Measurement and Performance

Now that you have learned to explain the relationship between aggregate demand factors and the balance on current account, you will find it relatively easy to explore the way in which supply factors will affect this measure.

In very broad terms, we can say that our exports will be maximised when we have enough goods and services to sell to people in other countries, and when our prices are internationally competitive. As a result, if we can find a way to increase aggregate supply, this should lead to an improvement in the balance on current account.

If you examine the following statistics, you will see that it is easy to prove this relationship.

Raw materials are used in the production process, and as a result they represent a significant percentage of the costs which must be met by businesses. When the price of raw materials increases, we can expect to see the aggregate supply curve shift to the left. This would suggest that we will have fewer products available for export, and the price of those products will have increased. (This relationship is explained in the graph above.)

During the period identified, we can see how this change affected the balance on current account for the Australian economy. As the price of raw materials increased, the size of the current account deficit relative to our GDP also increased. By 2004/05 the CAD had increased to -6.5% of GDP, and at times it was closer to -7%. There were several factors affecting the value of the CAD during this period (including an extended period of drought, which limited production of farm produce), however the impact of rising prices for raw materials was certainly apparent.

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