External Stability - Australia's Performance (1 Viewer)
- Thread starter dno
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Awesomeness...
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What so you mean by external performance? =S
Awesomeness...
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*do not so
External performance basically means Australia's external stability in relation to the Current Account Deficit (CAD), foreign liabilities, net foreign debt, net foreign equity etc.
Sorry if this is confusing you, but its one hell of a confusing question
Sorry if this is confusing you, but its one hell of a confusing question
Well ok
1. The CAD has not being a problem as Australia has been able to maintian a strong eocnomics grwoth, low unemployment rate and low inflaiton in the past due to to our massive exports of our resources like minerals etc tht shows Australia's ability to pay back to debt. Our external instbaility has not had a direct impact on Aus economy therefore governments has regarded external stbaility as a long run goal rather than a short run.
2. (REFER TO THE DEBT TRAP SCENARIO) It has been a problem becuase we aregetting more debts, this soon detiorates the internoitnal confidence on Aus;s ability to pay bak such a big debt, this leads to lower credit rating(increase in servicing interest). And to pay the increase in interest, aust may require to boroow more (increase in foreirgn liability) just to pay bak the interest...... and the cycle keeps going
The 2. is such a summary of th debt trap scenario, u should go to the eading edge book as it says it there. hope this helps
1. The CAD has not being a problem as Australia has been able to maintian a strong eocnomics grwoth, low unemployment rate and low inflaiton in the past due to to our massive exports of our resources like minerals etc tht shows Australia's ability to pay back to debt. Our external instbaility has not had a direct impact on Aus economy therefore governments has regarded external stbaility as a long run goal rather than a short run.
2. (REFER TO THE DEBT TRAP SCENARIO) It has been a problem becuase we aregetting more debts, this soon detiorates the internoitnal confidence on Aus;s ability to pay bak such a big debt, this leads to lower credit rating(increase in servicing interest). And to pay the increase in interest, aust may require to boroow more (increase in foreirgn liability) just to pay bak the interest...... and the cycle keeps going
The 2. is such a summary of th debt trap scenario, u should go to the eading edge book as it says it there. hope this helps
lionking1191
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chuck in 'pitchford thesis' for style points
gnrlies
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Well firstly as pointed out by someone else,policy makers usually regard economic goals into two distinct cateogories: Internal balance (inflation, growth and unemployment) and external balance (foreign debt, current account deficit, and exchange rates).dno said:
On the external balance side, exchange rates are usually not a big concern so long as they are stable.
But foreign debt and the cad can potentially cause bigger problems.
Best way analogy is your household budget. If you use your credit card to buy things you will accumulate debt, and have to pay interest on a monthly basis. The amount of interest payable will depend on the level of debt. So you have to decide how much debt you can afford to take on. If you have a job and you are earning an income you can probably afford to pay a certain degree of interest and therefore borrow a certain amount. This describes Australia's position. We earn an income because we grow, and our level of foreign debt is sustainable and our interest repayments (CAD) can be made. If however we weren't growing it may become an issue.
Many countries have this problem (debts that cannot be paid off) but Australia does not fit into this category. So there are definite arguments that suggest that these things need to be taken care of, but there is nothing to suggest that a country cannot have some level of debt. This is particularly true for Australia which has low national savings and has profitable investments.
the post above mentions the Pitchford thesis which especially deals with Australia's external stability. It basically says that we have no government debt and that it is incurred by the private sector and is being used for profitable investments. He is an ANU economist who released his paper in 1993 (I think) at a time where government policies were still actively targeting external stability (most notably monetary policy)
The 'Pitchford Thesis' also known as the 'consenting adults' thesis was popularised by Professor John Pitchford in the early 1990s.
Pitchford noted that Australia's CAD and foreign liabilities are almost entirely generated by the private sector (the private sector accounted for 99% of Australia's net foreign debt in 2008). He argued that the foreign borrowings helped to fund private investment projects, or are direct investments in firms and ventures by foreign residents. So long as private sector decision making is not disorted by other factors, individuals and firms make proper calculations of the risks and costs of borrowing from overseas, and borrowers and lenders are responsible for their own decisions - in other words they are 'consenting adults'.
In terms of the question you asked here are some things you can consider:
Why external performance isn't a problem:
- basically Australia has very low domestic savings, therefore they are forced to borrow from overseas. As long as the money borrowed from overseas goes towards funding things such as infastructure and/or capital equipment, foreign liabilities can be seen as sustainable as these things will contribute towards the expansion of Australian GDP - and we all know economic growth = more money!
- also as Australia is a young country we need to borrow from overseas in order to fund our economic growth. A high CAD and foreign liabilities level doesn't necessarily mean we're in the shits. During the 1990's Australia recorded sustainable economic growth, low inflation, falling unemployment and experienced no loss in foreign investor confidence even though we were experiencing high current account deficits and rising foreign debt.
Why external performance is a problem:
I won't go into too much detail with this as this question has already been answered in previous posts and is generally the easier question of the two to answer. However, a high CAD and high foreign liabilities can be a problem due to the following:
- Increased debt requires a larger percentage of our GDP, lowering the amount of income we have to invest domestically (thus lowering our quality of life and ability to grow as an economy). Take a look at the debt servicing ratio.
- It can act as a deterrent to foreign lenders in terms of our credit rating, where failure to pay back debts will cause foreign lenders to charge higher servicing costs (interest rates) on loans, increasing our foreign debt, and making it harder to pay back loans. (Check out debt trap scenario)
- Can possibly result in a loss of confidence in foreign investors, and in result a fall in the value of the Australian dollar. This in turn will make servicing costs on loans more expensive. It can have a positive effect as exports are more internationally competitive, however it will also cost more to buy imports (thats baad).
Hope some of that helps.
Pitchford noted that Australia's CAD and foreign liabilities are almost entirely generated by the private sector (the private sector accounted for 99% of Australia's net foreign debt in 2008). He argued that the foreign borrowings helped to fund private investment projects, or are direct investments in firms and ventures by foreign residents. So long as private sector decision making is not disorted by other factors, individuals and firms make proper calculations of the risks and costs of borrowing from overseas, and borrowers and lenders are responsible for their own decisions - in other words they are 'consenting adults'.
In terms of the question you asked here are some things you can consider:
Why external performance isn't a problem:
- basically Australia has very low domestic savings, therefore they are forced to borrow from overseas. As long as the money borrowed from overseas goes towards funding things such as infastructure and/or capital equipment, foreign liabilities can be seen as sustainable as these things will contribute towards the expansion of Australian GDP - and we all know economic growth = more money!
- also as Australia is a young country we need to borrow from overseas in order to fund our economic growth. A high CAD and foreign liabilities level doesn't necessarily mean we're in the shits. During the 1990's Australia recorded sustainable economic growth, low inflation, falling unemployment and experienced no loss in foreign investor confidence even though we were experiencing high current account deficits and rising foreign debt.
Why external performance is a problem:
I won't go into too much detail with this as this question has already been answered in previous posts and is generally the easier question of the two to answer. However, a high CAD and high foreign liabilities can be a problem due to the following:
- Increased debt requires a larger percentage of our GDP, lowering the amount of income we have to invest domestically (thus lowering our quality of life and ability to grow as an economy). Take a look at the debt servicing ratio.
- It can act as a deterrent to foreign lenders in terms of our credit rating, where failure to pay back debts will cause foreign lenders to charge higher servicing costs (interest rates) on loans, increasing our foreign debt, and making it harder to pay back loans. (Check out debt trap scenario)
- Can possibly result in a loss of confidence in foreign investors, and in result a fall in the value of the Australian dollar. This in turn will make servicing costs on loans more expensive. It can have a positive effect as exports are more internationally competitive, however it will also cost more to buy imports (thats baad).
Hope some of that helps.