Economic Issues: External Stability

Practice flashcards covering key concepts, definitions, and impacts of external stability on Australia's economy.

What is the definition of external stability (ES)?

External stability is the aim of government policy that promotes sustainability on external accounts to ensure Australia can service its foreign liabilities.

What are the key components of external stability?

1. The size of the Current Account Deficit (CAD) as a percentage of GDP. 2. Net Foreign Liabilities (NFD and NFE). 3. The value of the Australian dollar ($AUD).

How has Australia's current account deficit (CAD) changed over the years?

Australia's CAD declined from 4.9% of GDP to 2.9% in recent years, achieving a surplus in 2019-20.

What are the main issues affecting Australia’s external stability?

Persistent CAD, volatile terms of trade, declining international competitiveness, growth of foreign debt, and high levels of foreign ownership.

What is the relationship between CAD and external stability?

A large current account deficit (CAD) can negatively affect external stability by increasing financial outflows that exceed inflows.

What is the 'Pitchford thesis'?

The 'consenting adults' thesis states that CAD/foreign liabilities mainly come from the private sector, which uses foreign debt/equity for investment, fostering economic growth.

What are net foreign liabilities?

Net foreign liabilities are Australia's financial obligations (foreign debt plus foreign equity) to the rest of the world, minus the obligations to Australia from the rest of the world.

How does foreign debt impact Australia's external stability?

High foreign debt could lead to unsustainable debt levels, increasing interest payments, which can reduce Australia's standard of living.

What factors contribute to Australia's lack of international competitiveness?

Factors include high transport costs, lack of economies of scale in production, high labor costs, and limited financial backing for innovative businesses.

How does a rise in the Australian dollar ($AUD) affect external stability?

An increase in the AUD reduces international competitiveness, decreases exports, worsens the balance of goods and services (BOGS), and increases CAD.

What monetary policies can help achieve external stability?

Monetary policies, fiscal policies, and microeconomic reforms can be implemented to enhance external stability.

What are some effects of a decrease in the Australian dollar ($AUD)?

A decrease in the AUD increases international competitiveness, exports, improves BOGS, and reduces CAD.

How did the global financial crisis (GFC) in 2007-08 affect the Australian dollar?

The GFC led to a depreciation of the Australian dollar, which helped lift competitiveness through a lower exchange rate.

What measures can Australia take to improve its international competitiveness?

Engaging in microeconomic reforms, such as supply-side reforms that boost productivity and lower prices for exports.

What is the significance of a country's debt servicing ratio?

The debt servicing ratio indicates the proportion of export revenue that must be spent on interest payments on foreign debt, reflecting a country's capacity to service its foreign liabilities.