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External Stability

After learning about Australia’s trading position, it is now important that you understand the way in which these international transactions are tracked. This is significant because the Australian economy aims to achieve stability in the external sector. External stability is said to occur when we are able to meet our international financial commitments.

In the next few pages you will learn about a variety of measures used by statisticians in Australia to determine whether or not this goal has been achieved. For now, let’s consider two very simple examples.

First, imagine that you live in a country that is highly dependent on imported goods and services, and every year the people in that country import significantly more than they are able to export. To help pay for these products, they consistently add to the level of debt that they owe to other countries. And (although you might not understand the relationship at this stage) these actions ultimately mean that the currency of this nation has been depreciating for some time. Has this country achieved external stability?

We would certainly need more information to make a definitive statement, but on the surface it would seem that this country has not achieved this goal. The fact that their currency has been depreciating suggests that they are struggling to find the foreign currency that they need in order to purchase the imports that they want. This could ultimately lead to problems in the domestic economy as well. For example, the depreciation of the currency can result in imported inflation if the demand for imports remains high.

On the other hand, what if the country was equally dependent on imports, but was also an efficient exporter? National savings in that country are quite high, and so when they need to borrow money they can take it from the domestic savings pool, rather than adding to international debt. The currency of this country is quite stable.

It is clear that this economy has achieved stability in the external sector. It is significant that they are able to generate earnings from the sale of exports, and also that the people of this country have the option of borrowing domestic funds instead of looking overseas. It is not surprising, therefore, that this economy has been able to achieve external stability.

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