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Australia Composition of Trade 

What is "composition of trade"?

Composition of trade refers to the mix of goods and services that a nation exports and imports.

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How is it represented in data and graphs?

The graphs generally reflect the data as the percentage (%) that a particular industry constitutes as a total of export or import trade. You will most often see time series graphs, which help us to interpret changes over time ("temporal change" if you want to use some fancy words). Sometimes you might see a pie graph which will give you the information for a point in time. 

It is important to remember that this shows the industry share of exports and imports. It doesn't show the total export volumes (which are likely rise across time aross out industries).

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Why is understanding the composition of trade important? 

Interpreting temporal change in composition of trade helps us to identify structural changes in the types of industries in global economies. We can spot emerging industries, as well as industries in decline. We can also identify changes in demand for different types of exports and imports, as well as changes in supply. So then we can identify the industries where a nation may have a comparative and / or competitive advantage. â€‹â€‹â€‹â€‹

Analysis of Australia's export composition of trade 
 

​You can easily identify some big changes in Australia's composition of exports:

  • The growth of resources exports - now constituting over 60% of Australia's total exports. 

  • The decline in agricultural exports as a share of total exports. 

  • What other changes can you spot? eg. manufacturing?​

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REMEMBER: the graph shows share of exports - not volume of exports, so whilst an industry may have a smaller share, it still may be exporting more goods and services at historically high levels! â€‹

Explain the effects of changes to Australia's composition of trade 

The second marking criteria under Analysis is 'discerning explanation of economic relationships', so let's try and get 'discerning': 

  • What are the theoretical positive effects of the changes that you have identified in the data? 

  • What are the theoretical negative effects of the changes? 

  • And then what data could help you to expand your response and provide a deep discussion and justification of outcomes? 

 

Example: Australia has high share of total exports in resources. Most likely flowing to China as the major customer.

  • Positive: Likely increase in productive capacity and output, utilising our abundance of 'land' factors of production, which creates employment and increases national income in high productivity industries. 

  • Negative: Heavy reliance on a particular export industry - what happens to our total export volume when demand for resource exports decreases? How does that affect GDP? (Hint: have a look at the decline in Australia's GDP around 2016 when the Chinese economy experienced contraction (or 2020 during the Covid pandemic). 

  • What other positives and negatives can you think of, and what additional economic information would you need to access to help to expand your response and provide deep discussion of outcomes?

Analysis of Australia's import composition of trade 

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​The import composition of trade doesn't indicate the same level of significant changes as the export composition of trade.

 

We can note that consumer goods are on the rise (as a share of total imports) as well as transport equipment. This makes sense. The decline in manufacturing in Australia means that we rely more heavily on imports of final goods  (including motor vehicles) than we did back in the 1960's.

 

Another interesting aspect in the graph (related to the decline in Australian manufacturing) is the decrease in Industrial supplies - the materials that are used in manufacturing processes. ​

Now over to you:

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Use the method of analysis demonstrated above for export composition of trade and make the analysis for the import data. 

  • Identify trends, patterns, similarities and differences

  • Make sure that you are clear on the big changes and compare and contrast to the small changes ('discerning')

  • Quantify and calculate (eg % change, range, $ values, rate of change, volatility etc)

  • Explain the positive and negative effects (both theoretical effects, and any effects reflected in data)

Australia Net Exports / Balance of Trade (BoGS)

How to analyse the data

 

1. Calculation and economic theory

Before you begin analysing any data, make sure that your understanding of the relevant economic theory is solid. 

Net Export data is the same as Balance of Trade and Balance of Goods Sold / Services (as we refer to it in the the Balance of Payments). 

The formula is value of exports minus value of imports. In other words X-M. See the link here back to leakages and injections in the Circular flow model!

Net exports is a component of the Aggregate Demand formula, where AD=C+I+G+(X-M). 

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2. Review the information in the graph

Make sure you are clear on:  title, explanatory notes, the units of measure. Check if price values are abbreviated on the y-axis. 

Link your formula to the data to build some understanding. 

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3. Interpret the data

Where net export value is less than zero, Australia has imported more goods and services than it has exported. So there is a net loss of income out of Australia.

Where net export value is greater than zero, Australia is exporting more goods and services than it is importing, So we see a net inflow of income into Australia.

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4. Make meaning of the data

Use your analysis 'toolkit' (eg. cause and effect, compare and contrast etc) to deepen your interpretation.

My take is that historically (up until 2008/9) Australia has been a net importer of goods and services. Effect is that we are sending our income overseas, so leakages are greater than injections, and therefore, the Net Export position is having a contractionary effect on economic activity. 

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Then in 2009 we see a significant change to a positive net export position around the time of the 'mining boom' (big increase in commodity exports to China. There were a few contributing factors:

  • Higher value AUD (higher price for the same quantity of the export) - check the currency data above

  • Higher commodity prices (high levels of demand led to higher per-unit prices) - check the terms of trade data above

  • Increased volume of sales 

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In 2022 we see the most significant change in Net Exports in the data set. So what caused the changes? Here are some likely reasons: 

  1. Exports increased whilst Imports remained the same, or

  2. Exports stayed the same and Imports decreased, or

  3. Exports increased and Imports decreased. 

Also, how could we interpret the Terms of Trade data on relative prices to help us determine causes?

And what was the AUD value at the time? 

Now its up to you to find the real world information to determine the reasons for this significant change. 

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5. Consider the effects on stakeholders and implications for the economy

In step four you considered the economic events that caused the changes. 

Your understanding of economic theory can help you to extrapolate effects on stakeholders (households, firms and government). 

You can also dive into further data find effects (eg. did export-oriented firms receive increased income during the positive Net Export periods). 

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Give this method a try with other data and let me know if it works!

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Terms of Trade Australia

OECD definition:

Terms of trade reflect the relative price between a country’s exports and imports, and are measured as the ratio of the export price index to the import price index. 

Terms of trade indicate whether a country can purchase more or fewer imports for the same amount of exports. An increase in export prices relative to import prices signals an improvement in terms of trade.

The indicator is presented as an index, with 2020 as the base year.

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Quick analysis: 

Australia's terms of trade have improved significantly over the last 25 years primarily due to  a sustained boom in commodity export prices (iron ore, coal, LNG), driven by rapid industrialisation in China and emerging Asian economies. This was supported by increased export volumes, competitive depreciation of the Australian dollar at times, and falling import prices for technology. 

Key factors driving the improvement include:

  • The Mining Boom (Structural change)

  • Export Volume & Price Growth

  • Declining Import Prices

  • Diversification & Trade Agreements

  • Service Export Growth

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Deepen your understanding:

Click here for the Australia and the Global Economy – The Terms of Trade Boom Explainer from the Reserve Bank of Australia

Exchange Rate: Australian dollar to US dollar

Review your understanding with resources from the Reserve Bank of Australia (RBA):

  1. Click here for the Exchange Rates and their Measurement  Explainer by the RBA (or click here for the video version)

  2. Click here for the Exchange Rates and the Australian Economy  Explainer by the RBA (or click here for the video version)

  3. Click here for the Drivers of the Australian Dollar Exchange Rate  Explainer by the RBA (or click here for the video version)​

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Key Periods in AUD History (1999–2026)

  • 1999–2001: The Trough (Low Point): Following the Asian financial crisis in the late 1990's, the AUD fell to a low of 47.75 US cents in April 2001.

  • 2002–2011: The Mining Boom & Appreciation: The currency experienced a massive, sustained appreciation driven by increased demand  for Australian commodity exports (iron ore, coal) from China. Consequently, increased demand for AUD to pay for these commodities leads to currency appreciation.

  • 2010–2013: Parity with the USD: In October 2010, the AUD reached parity (1:1) with the USD for the first time since it became a floating currency (1983). It peaked above US$1.10 in July 2011.

  • 2014–2020: Post-Boom Normalisation: Following the end of the mining investment boom and falling terms of trade, the AUD depreciated from its 2013 highs. It hit a low point during the initial COVID-19 pandemic market stress in March 2020.

  • 2021–2026: Consolidation and Volatility: The AUD has generally hovered lower, influenced by interest rate differentials between the RBA and the US Fed. The Australian cash rate has been lower than US cash rate, thus influencing flow of financial investment to US. In turn, this increases demand for USD, and consequently reduces demand to AUD - so AUD value falls relative to USD.  Also, China's economic performance is below historic demand, which reduces commodity exports . As of early 2026, the AUD  is considered undervalued by some, acting as a buffer (automatic stabiliser) for the economy - eg. maintaining export volumes / output as export goods are relatively cheaper for overseas buyers.

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Primary Drivers of the AUD (Since 1999)

  • Terms of Trade (Commodity Prices): The most significant driver. High commodity prices (mining boom) drive appreciation, while declining terms of trade (post-2013) drive depreciation.

  • China Exposure: Because a large portion of Australian exports go to China, the AUD is highly sensitive to China's economic health and manufacturing sector.

  • Interest Rate Differentials: The gap between RBA rates and other major central banks (especially the Fed) influences capital flows. Higher relative rates in Australia tend to support the AUD.

  • Global Risk Sentiment: As a "risk-on" currency, the AUD often appreciates during times of global economic optimism and depreciates during crises (flight to quality). 

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Structural Changes to the Australian economy

  • Internationalisation: The AUD has become the 6th most traded currency globally, with the AUD/USD pair being the 4th most traded.

  • Floating Exchange Rate: The RBA has maintained a free float, which has allowed the currency to act as a "shock absorber" for the economy, adjusting to commodity price shocks.

  • Inflation & Purchasing Power: $100 in 1999 had the same purchasing power as approximately $209.94 in 2026, reflecting a 109.94% cumulative price increase over that period. â€‹

Foreign Investment

There are two main ways in which foreign residents or companies can invest funds in the Australian economy:

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Portfolio investment (PI) refers to the purchase of securities (such as stocks or bonds) or equity and debt transactions that do not offer the investor any control over the operation of the enterprise.

Common examples include

  • the purchase of property (equity),

  • shares in Australian companies (equity) or

  • government bonds (debt) by foreign superannuation or pension funds.

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​​Foreign direct investment (FDI) is when an individual or entity from outside Australia establishes a new business or acquires 10 per cent or more of an Australian enterprise, and so has some control over its operations. Common examples include

  • the establishment of Australian branches of multinational companies or

  • joint ventures between Australian and foreign companies.

(from:  https://www.dfat.gov.au/trade/investment/about-foreign-investment)

Level of investment, by components, 31 December 2024.png

Graph 1: 

Graph 2: 

​​How to analyse the data

 

1. Calculation and economic theory

Before you begin analysing any data, make sure that your understanding of the relevant economic theory

and key terminology is solid. 

Some ideas to review: 

  • What is the purpose of FDI into Australian economy?

  • What do we call the financial returns to on FDI to international investors?

    • (Hint: think back to your sources of income from factors of production in Unit 1)

  • What are the two ways in which investors acquire a financial return on PI - Equity?

  • What is the financial return on government bonds and other debt called?​​​​​

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Net International Investment Position =

Australian Investment abroad / outflows (assets) minus Foreign Investment in Australia / inflows (liabilities)

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2. Review the information in the graph

Make sure you are clear on:  title, explanatory notes, the units of measure. Check if price values are abbreviated on the y-axis. 

Link your formula to the data to build some understanding. 

​

3. Interpret the data

Using graph 1 (above at left), we can determine the following investment outcomes in 2024:

  • Australia is a net liability holder (negative value) in Direct Investment - higher investment inflows into Australia than Australia invests abroad (outflows).  

  • Australia is a net asset holder (positive value) In Portfolio Investment (Equity) - Australians invest into overseas share markets at a higher value than international investment into Australian share market. Outflows are greater than inflows.

  • International markets have significantly higher investment in Australian debt markets than we have in international debt markets. Outflows are less than inflows.

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Graph 2 shows the trends over time ​of international investment position. We can see that international investment into Australia has always been higher than Australian investment abroad. However, the column graph is odd. It shows the difference between assets and liabilities as a positive value, when I would think that it should be expressed as columns to negative values on the y-axis to signify a liability. The ABS website even goes so far as to state that Australia’s International Investment Position (IIP) was a liability of $653.2b at 31 December 2024, a decline of $165.5b from the end of 2023. So please don't get confused by the column graph being in positive values - it is a liability. Let me know if you can clarify my interpretation of this data.

 

Net Investment data from the World Bank can help us to deepen our analysis: 

The trend to negative net FDI values means that there are increasing levels of International FDI into Australia relative the level of Australian FDI investment abroad

The trend to positive net PI values means there are increasing levels of Australian PI investment abroad, relative to the level of PI investment coming into Australia from overseas

4. Make meaning of the data

Use your analysis 'toolkit' (eg. cause and effect, compare and contrast etc) to deepen your interpretation.

From the data available above, my take is that generally Australia has experienced net inflows of FDI - more investment dollars from Australia being invested overseas than foreign stakeholders are investing in Australia. In contrast to the FDI liability position, the PI position displays a trend towards positive values, signifying greater net outflows of PI. So we get FDI into Australia to build our productive capacity so firms can increase output and deliver profit through direct ownership in firms (which has low liquidity / difficult transfer of ownership). And Australia invests overseas in equities such as shares (high liquidity / easy transfer of ownership) that will deliver either capital growth in value, or dividend returns, or both. 

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5. Consider the effects on stakeholders and implications for the economy

In step four you considered the economic events that caused the changes. 

Your understanding of economic theory can help you to extrapolate effects on stakeholders (households, firms and government). 

eg. these investments will yield income return for investors - what will be the net flows of income from, say, a negative FDI position?

eg. Australian portfolio investment abroad is very strong - where did this money come from and what are the longer-term effects?

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Some ideas to help you along the last two steps: 

Key Trends in Australia’s Net Investment Position

Resources Boom (2002–2007): The mining boom spurred massive foreign capital investment into Australia to increase the productive output of the mining sector. 

Shift to Net Equity Assets (2013–Present): A major structural change occurred around 2013, where Australia shifted from being a net foreign equity liability position to a net foreign equity asset position. This means Australians now own more equity in foreign companies than other nations own in Australian companies.  This change has been largely driven by the growth of the Australian superannuation sector, which totals AUD$4.3 trillion (as of October 2025). 

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Key Drivers of Change

  1. Superannuation Growth: The mandatory superannuation system has increased national savings, reducing the need for foreign funding for domestic investment, as well as providing cash for investment in other overseas firms and government

  2. Valuation Effects: Strong performance of foreign equity holdings (eg. shares in foreign companies) by Australian funds has boosted outward investment values.

  3. Currency Value: a structural decline in value of AUD from 2012 onwards increases the value of overseas investments held by Australians.​

Australia's Balance of Payments

Balance of Payments (BoP) account is a statistical record of the money value of all financial transactions between Australia and the rest of the world. 

BOP is important because : 

  • BOP summarises economic conditions in a nation

  • BOP helps to evaluate a country’s solvency

  • Summarises nature, size, composition and direction of a country’s international trade

  • It clarifies the foreign exchange position of a country 

    • e.g. high Aust exports = high demand for AUD from other nations = increase in relative value of AUD

  • It informs the trade, industrial and economic policies of the Government:

    • If balance of payments is favourable, the Government will take liberal view of imports, otherwise different types of restrictions (tariff and non-tariff measures) will be imposed as corrective measures. 

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Structure of Balance of Payments

Syllabus / Subject matter

Topic 1: International trade

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In Topic 1, students understand the dynamic nature and extent of Australia’s international trade interconnections. They examine the reasons for international trade and Australia’s place in the global economy. Current statistics are analysed to reveal relationships, patterns and trends that cause and affect Australia’s economic growth. Economic models are used to analyse movements in exchange rates over time and evaluate the consequent impacts on the domestic economy. Trends in the balance of payments are analysed to evaluate the implications for the Australian economy.

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  • Comprehend and describe key concepts using economic terminology, including absolute advantage, comparative advantage, competitive advantage, currency devaluation, currency revaluation, economic integration, economic union, exchange rate appreciation and depreciation, external stability, internal stability, factor endowment, exchange rates (fixed, floating and managed), free trade, sustainable economic growth, trade liberalisation, balance of payments, balance of trade, capital and financial account, current account deficit, current account, foreign investment, foreign debt, and terms of trade.

  • Comprehend the concept of an open economy to explain how it operates in terms of the circular flow of income model.

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  • Comprehend and explain the advantages and disadvantages of international trade, and how trade can impact economic policy, including sustainable economic growth, and external and internal stability.

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  • Analyse the composition and direction of Australia’s trade patterns (e.g. the five largest importers and exporters), compare them to emerging patterns and trends in international trade, and calculate the percentage change from one period to the next.

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  • Comprehend and explain the development and contemporary relevance of trade theories, including the economic theories of absolute (see Adam Smith), comparative (see David Ricardo) and competitive advantage (see Michael Porter), and apply these theories using relevant diagrams and models.

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  • Comprehend, explain and construct diagrams applying demand and supply factors in a floating exchange rate system.

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  • Comprehend and explain the factors underlying the demand and supply of the Australian currency and how a floating exchange rates insulates the Australian economy from external shocks.

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  • Select data and information to analyse and evaluate

    • effects of changes in Australia’s terms of trade on the economy from a range of perspectives

    • causes of exchange rate appreciation or depreciation movements

    • government policy responses to exchange rate movements and changing trade relationships using criteria e.g. employment in trade-exposed industries, economic growth (nationally or in state or local regions), efficiency (allocative and dynamic costs), and importation of goods and services.

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  • Comprehend, explain and classify a country’s international transactions into current and capital account statements.

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  • Comprehend and explain the significance of foreign investment to Australian economic development, e.g. to finance mining booms.

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  • Select data and information to analyse and evaluate

    • patterns of Australia’s balance of payments including the current account and balance of

      trade over the last 5 or 10 years, including the percentage change

    • cyclical and structural causes and effects of Australian current and capital account trends

    • the significance of movements within the balance of payments on the domestic economy, from a variety of perspectives, e.g. import and export suppliers, and buyers

    • the significance of Australia’s foreign debt position and foreign investment longitudinally .

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  • Create responses that communicate economic meaning using data, information, graphs and diagrams to suit the intended purpose in paragraphs and extended responses.

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