1. What is the main measure of inflation movements in Australia and what does it represent?

CPI refers to the Consumer Price Index and is used as the primary measure of inflation movements within Australia over time. CPI can be defined as a measure of how the prices of goods and services change over time. It is a measure of overall cost a typical consumer pays for the purchase of goods and services. A larger increase in CPI represents an inflationary trend in the economy and decrease in CPI shows deflationary situation. It also helps in comparing the inflation patterns with other countries of the world.

CPI can be calculated using the following formula:

Inflation refers to the persistent rise in the general price level in the economy. Rising inflation negatively affects the purchasing power of a typical consumer, therefore, a typical family has to spend more to maintain his existing standard of living. We can estimate the rate of inflation in the following way:

Where:

 refers to Inflation rate in the current financial year.

 refers to CPI in the preceding financial year.

 refers to CPI in the current financial year.

CPI is considered as a benchmark inflation guide for the Australian economy

2. The balance of payment is a record of monetary transactions between Australia and the rest of the world- it is made up of two accounts. What are the names of the accounts and what do they measure?

Balance of payment keeps track of inflow and outflow of money from the economy of a country. It consist of two main accounts:-

1. Current Account
2. Capital Account

1. Current Account

The current account measures trade flow in and out of the country. In other words, it represents country’s exports and imports. It consist of following three components.

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1. Trade in goods and services
2. Net Foreign Income
3. Current Tranfer/Foreign aid

1. Trade in Goods and Services

The most important component of the current accounts is the balance of trade showing the country’s imports and exports of goods and services. If exports are larger than imports, it is a balance of trade surplus and if exports are fewer than imports shows a balance of trade deficit.

2. Net foreign Income

If local companies or individuals of a country (let say Australia) purchase bonds and stocks in other countries, the money will come into the country in the form of interest and dividend payments and will add to the net foreign income. On the other hand, the money that leaves the country in the form of interest payments and dividends to foreign investors, royalties paid by the subsidiaries (located in Australia) to their overseas head offices decreases the total net foreign income.