External Stability

Question 1

Define external stability

Answer 1

Aim of government policy that seeks to promote sustainability on the external accounts so that Australia can service its foreign liabilities in the medium to long run and avoid currency volatility

Question 2

How is external stability achieved?

Answer 2

Through sustainable outcomes, focusing on a country’s:

• Current Account Deficit (CAD)
• Net foreign liabilities (NFL)
• Exchange Rates

Question 3

Describe the trends in the CAD.

Answer 3

Australia has historically been in deficit - CAD widened from 2% of GDP in 2001 to 7% in 2007
- After the GFC the CA went into surplus (in June 2019) achieving a surplus of 2.9% in December 2020

Question 4

Outline the trends in NFL. How is it measured?

Answer 4

2013: NFD peaked at 62.8% GDP
2016: stabilised at approx. 53% of GDP
2019: NFE was approx. -10% of GDP
2020: NFL declined to a figure less than 50% of GDP

Measured by NFL to GDP ratio:
NFL (NFD + NFE)
———————— * 100
GDP

Question 5

How do exchange rates impact external stability?

Answer 5

The volatility of the AUD has a significant impact on external stability as changes in the AUD have a large impact on our IC, the size of the CAD, and on debt servicing

Question 6

How is the CAD measured? Why is this measurement preferred?

Answer 6

CAD is measured by the CAD to GDP ratio:

CAD
——- * 100
GDP

• The best measure of trends in the CA as it allows for an accurate comparison across time and between countries

Question 7

Why was the CAD blamed on trade deficits?

Answer 7

CAD blamed on persistent deficits and on the BOGS, caused by:

• Australia’s lack of international competitiveness (ranked 16th on Global Competitiveness Report)
• Australia’s TOT: relationship b/w movement in TOT and Aus’ trade balance has strengthened in recent years

Question 8

Why was the CAD blamed on the Savings and Investment Gap?

Answer 8

As Australia has a small population, the level of spending is lower than the level of saving - thus the economy relies heavily on OS capital investment inflows to fill this gap

Question 9

Why was the CAD balmed on the Consenting Adult Theory?

Answer 9

This theory long as the CAD is a result of savings and investment decisions and not distortions in normal market mechanisms, there is no need for concern