External Stability Flashcards
What is external stability?
Ensuring that Australia can finance its obligations to the global economy
What is external stability made up of?
The Current Account
Net Foreign Liabilities
The Exchange Rate
What has been Australia’s history with the CAD as a percentage of GDP?
Since the 1980s, Australia has had a long history of CADs, averaging between 3-6% of GDP
This has been caused by a savings-investment gap
In 2019, an improvement in the BOGS saw Australia achieve its first Current Account surplus
Why does the Pitchford thesis claim that Australia’s CAD was sustainable?
Many economists have argued that Australia’s CAD is sustainable because it is the result of high levels of direct investment into Australia
These investments help generate higher economic growth and exports in the longer term
The Pitchford Thesis states that as long as a CAD is the result of savings and investment decisions by the private sector and not the distortion of normal market mechanisms, then there is no cause for concern
Why is Net Foreign Debt as a Percentage of GDP important to external stability?
If the size of the debt is rising faster than the increase in GDP, the interest payments of the debt will take up a greater proportion of the GDP
This may pose debt sustainability problems in the future, impacting Australia’s credit rating
What are some recent statistics to do with Net Foreign Debt as a percentage of GDP?
Over the last decade, Australia’s net foreign debt as a percentage of GDP has averaged 56%
This is considerably lower than other advanced economies - US external debt accounts for 95% of the nation’s GDP
As of 2020, Australia has a AAA credit rating from all three credit agencies
What is the significance of Net Foreign Liabilities as a percentage of GDP to external stability?
It represents how much of Australia’s economic activity can be attributed to international markets
Current statistics on Net Foreign Liabilities as a percentage of GDP
Australia’s net foreign liabilities reached a 21-year low of 40 per cent of GDP in the March quarter after a depreciating local currency boosted the value of Australian investors’ offshore stocks and shares.
What is the impact of the Terms of Trade on external stability?
An improved TOT leads to an improvement in the BOGS, and thus Australia’s external stability
Strong prices in iron ore and the mining industry have helped to improve Australia’s terms of trade over the past two decades, contributing to the 2019 CAS
What is the impact of the exchange rate on Australia’s external stability?
A change in the exchange rate influences the BOP by affecting international competitiveness, and the size/servicing costs of foreign debt
If the exchange rate is volatile, it causes instability and decreases investor confidence in all three areas
What is the impact of international competitiveness on Australia’s external stability?
As a country becomes more competitive, exports, TOT and BOP increase
Australia has achieved increasing international competitiveness through structural change (microeconomic reform) and a competitive currency which has made the economy more efficient
What are the negative effects of a CAD?
High Net Primary Account Outflows - this will lead to increased debt repayments and a potential debt trap scenario
Depreciating/volatile exchange rate - this may cause imported inflation and the valuation effect on debt (increased overall value of debt denominated in $AUD)
Increased Interest Rates - high external instability may encourage the government to implement contractionary policy to encourage saving
