Economic Goal :
External Stability
Goal of External Stability

Definition 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 Stability

Three 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 Payments
The 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 Rate

Trade 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 Debt
Net 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