External Stability Essay

Topics: Macroeconomics, Economics, Investment Pages: 3 (1375 words) Published: January 29, 2015
Q27: Analyse the causes and effects of fluctuations in Australia’s external stability.

External stability is an aim of government policy that seeks to promote sustainability on the external accounts so that Australia can service its foreign liabilities in the medium to long run and avoid currency volatility. The main causes of fluctuations in external stability include changes in the current account and net foreign liabilities, which, if not managed appropriately, can result in detrimental effects for Australia’s exchange rate and credit rating. Currently, Australia’s current account deficit sits at 2.9% of GDP, having averaged close to 4.5% since 2004. Australia’s net foreign liabilities in 2012-13 were 56.3% of GDP, with net foreign equity representing 3.8% of GDP and net foreign debt representing 52.5% of GDP. However, Australia’s persistent current account deficit and recent growth in net foreign liabilities are yet to cause concern, as they are considered to be providing productive investment, expanding economic activity in the process.

The Current Account Deficit (CAD) is recorded when the debits in the current account (imports and income payments to overseas) are greater than the credits (exports and income payments from overseas). Historically, Australia has suffered from a lack of international competitiveness and poor terms of trade, due to its geographical isolation and the composition of its exports, primary commodities. However, globalisation, rising commodity prices and the rapid industrialization of China have effectively negated these concerns. In the past three years the size of Australia’s current account deficit has tended to fluctuate for three different reasons. Firstly, the surplus on the goods and services balance has fallen, reflected by the decline in the merchandise trade surplus from $13,807 million in 2011-12 to $1,415 million in 2012-13. This is due to a slowdown in export growth and income, and a rise in import spending,...
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