The individual components of the balance of payments together play a pivotal role on the value of the Australian dollar. The balance of payments can be defined as a record of the transactions of the transactions Australia with the rest of the world. It allows economists to study whether Australia's external position is sustainable and whether there are too many outflows in relation to inflows. In turn, changes in the components of the balance of payments have a significant impact on the Australian economy and in particular the value of the Australia dollar as they indicate Australia's transactions with overseas nations. .
The balance of payments can be divided into the current account and the capital and financial account. The current account consists of non-reversal transactions including the net primary income section, which mainly records returns on investment, the balance on G+S, which is the difference between aus exports and imports and the net secondary account, a minor section that was a deficit of $-1.1 bn in 2012, recording the unilateral transfer of money. The capital and financial account records reversible transactions and consists of the capital account and the financial account.
To examine the impacts of changes to components of the balance of payments on the AUD, each part must be analysed separately. Firstly, changes to the BOGS significantly influences the value of the AUD. This is because changes to demand for exports and imports will lead to an appreciation or depreciation of the currency. For example, an increase in demand for Aus exports from china has been recently occurring with a 55% jump in demand for iron ore, will increase demand for the AUD and cause an appreciation. This is best shown through an increase in demand on a diagram.
[SD graph of AUD showing an increase in demand] .
As seen on this diagram, the price of the $A has increased due to the sharp rise in demand for exports.