Economic Goal : External Stability

Goal of External StabilityDefinition of Goal: The Australian

government’s goal of external stability is defined as the desirable situation where Australia is living within its means and able to pay its way in its international transactions, without the burden of these overseas payments causing severe problems that could reduce our living standards.

Measuring External StabilityThree indicators can be used to gauge how well

Australia is performing in relation to this goal:1. The size of the current account deficit (CAD)

should not be too large. CAD:GDP should be between 3 – 4 %.

2. The exchange rate should be reasonably stable to protect our purchasing power. Unwanted fluctuations in its value (as measured by the Trade Weight Index, TWI) should be avoided.

3. The Net Foreign Debt (NFD) and associated repayments should not be too high. The NFD:GDP should be below 40%.

Balance of PaymentsThe balance of payments account is an

annual statistical record of the money value of both current, and capital and financial transactions between Australia and the rest of the world.

Money received by Australians is recorded as a credit

Money paid by us to overseas countries is recorded as a debit.

The Exchange Rate

There are two measures of the Exchange rate

Individual Exchange Rate: the value of one nation’s currency in relation to another is determined by the market forces of supply and demand for the currency. Eg. $Aust/$US, $Aust/ Yen

The Exchange RateTrade Weighted Index: the average value

of the Australian dollar against a basket of foreign currencies of Australia’s trading partners, weighted according to their relative trading importance with Australia.

The statistic we use to measure the general trend in the exchange rate is the Trade Weighted Index (TWI)

Net Foreign DebtNet Foreign Debt (NFD): is the difference

in the value between what Australian households, businesses and governments have borrowed from and owes overseas minus what Australia has lent or invested abroad.

Two types of borrowings:◦Public sector or official government borrowing◦Private sector or non-official borrowing