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Twin deficits theory (1 Viewer)
- Thread starter karpov
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sixleadballoons
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I don't understand.. isn't most of the CAD due to private debt, not government? How does a rise in public sector saving reduce the CAD? Or is this theory not specificaly related to Australia?
you are quite right sixeleadballons most of our CAD is a result of private sector transaction.
Twins deficit theory applied to Australia during the keating years and the early Howard years when Howard was committed to running large budget surpluses in order to retire public sector debt. As a result government foreign debt as a proportion of GDP has fallen from 19.1% in 1995 to around 1.7% now.
In an essay you would talk about the changing role of fiscal policy including twin deficits theory in the late 1990s etc...
Twins deficit theory applied to Australia during the keating years and the early Howard years when Howard was committed to running large budget surpluses in order to retire public sector debt. As a result government foreign debt as a proportion of GDP has fallen from 19.1% in 1995 to around 1.7% now.
In an essay you would talk about the changing role of fiscal policy including twin deficits theory in the late 1990s etc...
this used to be the case in australia and is why Keating, when he was treasurer called us a 'banana republic'...sixleadballoons said:
we eliminated our public debt (from 19% to 3% but once telstra is sold there wont be a debt anymore) so it doesnt actually apply now
sixleadballoons
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Oh ok- yeah thats what I thought. That "banana republic" quote is so good- it can be put in almost any essay concerning Australia
nanashi
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my teacher told it like this:
equilibrium in an economy is when
S + T + M = I + G + X
rearranging:
(S - I) + (T - G) = (X - M)
assuming that S = I:
then T - G = X - M
therefore if:
T < G, then X < M
i.e. Budget deficit (T < G) and a Current Account Deficit (X < M)
equilibrium in an economy is when
S + T + M = I + G + X
rearranging:
(S - I) + (T - G) = (X - M)
assuming that S = I:
then T - G = X - M
therefore if:
T < G, then X < M
i.e. Budget deficit (T < G) and a Current Account Deficit (X < M)
Lol, dudes be careful when relating the Banana Republic issue with deficits.
Basically, what Keating was trying to imply...imagine a hypothetical economy that only exports bananas, because, well that's they only thing that the economy is good at - i.e. Primary / Commodity Industries (nudge nudge, ring a bell with the Australian Economy??)
The Banana Republic overall is trying to state that Australia's structural problem is its narrow export base, in fact I find it highly amusing and amazing that Australia is still an advanced/high income economy whol sells sheep and rocks to overseas economies as their exports!!!
So, relating this back to the topic, its more of a structural / limitation as to our Current Account Deficit sustainability. This I doubt is affiliated to the twin deficits theorem.
Also, a little clarification, yes our CAD is mainly due to private sector borrowing, but think of this, how do Private Sectors fund their investment, financial operations?? Well, lol if our household savings level is low, they really don't have much choice, but to look to overseas financial markets in order to fund their current foreign debt, hence the reason why our Australian Govt is trying to solve this problem by reducing its Govt Debt first, then encouraging domestic savings to increase as seen through our recent Budget....
Hope this helped everyone who is doing last-minute cramming, lol I'm gonna sleep soon...then get up tomorrow morning and read some past essay questions. Though, I have to say with the past exams that we've all done, we've been abit surprised, so I'd have to say that the Globalisation Case study will not be an essay this year, but more like a 6 mark short answer.
Basically, what Keating was trying to imply...imagine a hypothetical economy that only exports bananas, because, well that's they only thing that the economy is good at - i.e. Primary / Commodity Industries (nudge nudge, ring a bell with the Australian Economy??)
The Banana Republic overall is trying to state that Australia's structural problem is its narrow export base, in fact I find it highly amusing and amazing that Australia is still an advanced/high income economy whol sells sheep and rocks to overseas economies as their exports!!!
So, relating this back to the topic, its more of a structural / limitation as to our Current Account Deficit sustainability. This I doubt is affiliated to the twin deficits theorem.
Also, a little clarification, yes our CAD is mainly due to private sector borrowing, but think of this, how do Private Sectors fund their investment, financial operations?? Well, lol if our household savings level is low, they really don't have much choice, but to look to overseas financial markets in order to fund their current foreign debt, hence the reason why our Australian Govt is trying to solve this problem by reducing its Govt Debt first, then encouraging domestic savings to increase as seen through our recent Budget....
Hope this helped everyone who is doing last-minute cramming, lol I'm gonna sleep soon...then get up tomorrow morning and read some past essay questions. Though, I have to say with the past exams that we've all done, we've been abit surprised, so I'd have to say that the Globalisation Case study will not be an essay this year, but more like a 6 mark short answer.