Australia's Recent Performance
As we analyse Australia’s external stability using three different measures, you will need to be familiar with the trends in all three.
The Current Account Deficit
The cyclical nature of the current account deficit is clearly seen in the graph below. The fluctuation between -3% of GDP and -6% of GDP is evident. During the cycle, the CAD peaked at -6.1% of GDP in 2006/07. This corresponded with a strong Australian dollar, and a period of increasing domestic demand. As this demand was not being met by existing domestic supplies, demand for imports increased and the CAD grew quickly. The AUD was appreciating, which increased demand for imports (as they became less expensive) and therefore the balance on current account increased.

The Australian Dollar
The trend in the Australian dollar has been very important to the overall performance of the Australian economy during the last 10 years. As the domestic economy has come to rely heavily on the external sector, the importance of variations in the Australian dollar has increased. It is important to note that whilst the Australian dollar depreciated against the USD in the late 1990s, at the same time our TWI was relatively stable. This is because of strength in the USD, and simultaneous weakness in the Asian currencies.

Net Foreign Debt
Australia’s NFD has increased dramatically during the last 10 years. However, it is important to note that our GDP has also increased during this period. As a result, our NFD as a percentage of GDP has increased at a much slower rate. (NFD has tripled during this period, while as a percentage of GDP it has "only" doubled.)

It is also worth noting that when Australia's Net Foreign Debt exceeded $400 billion for the first time in 2004, it was the cause of much concern amongst the nation's media. Just two years later, the figure topped $500 billion (it had taken four years to increase from $300 billion to $400 billion). Two years after that the figure exceeded $600 billion. Despite this, the national concern over the level of debt seems to have abated to a certain extent.
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Unit 1
Unit 3

