External Stability

Definition

In very general terms, the phrase “external stability” refers to a situation in which the Australian economy is able to meet its international financial commitments. In reality this is far more complicated than it sounds, as there are many factors interacting to affect the overall ability of any individual or business to meet these commitments.

For our purposes, we will develop an understanding of three different measures that are used to assess external stability. They are:

The Exchange Rate: The exchange rate is the value of the Australian dollar as expressed in another currency. The Australian dollar is often expressed in terms of the US dollar, because this is the country with which we complete the majority of our trade. However, we have a separate measure called the Trade Weighted Index which assesses movements in the value of our currency against all of our trading partners.
Net Foreign Debt: Gross foreign debt is the total amount that we owe to organisations that are situated overseas. Net Foreign Debt is equal to the total debt less any lending by Australians to people and institutions overseas. The majority of Australian international debt is held by financial institutions – only a very small percentage is held by the various levels of government.
The Current Account Deficit: The current account is one part of the Balance of Payments. In Australia, we have traditionally run a deficit in this account. This suggests that we import more than we export. Further analysis would reveal that the largest contributor to the level of our CAD is the payments that need to be made to cover the interest on our Net Foreign Debt.

These three measures are closely related – any movement in one will have an impact on the others. It is very important that you develop an understanding not only of the various parts, but also of the relationships between them.

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