External Stability

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1. Goal:
The Government’s main goal in regards to External Stability is to meet its financial obligations that usually arise from a transaction with the rest of the world.
Sustain its Current Account Deficit between 5-6% GDP
Service its Net Foreign Debt between 50-60%
Sustain a stable exchange rate to maintain competitiveness

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2. Balance of payments:
It provides a statistical data of the financial transaction between Australian residents and the international residents.
- Comprise of two major components; Current Account and Capital & Financial Account

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3. Net Foreign Debt
Is defined as the difference in value of what Australians owed or borrowed overseas minus what Australians lent or invested abroad.
- Sum total of direct investment in Australia with the rest of the world

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4. Terms of trade
The price of Australia receives for our export

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relative to the price paid for imports

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Impact on living standards of changes in international transaction
1. Prices in Australia
- Import prices affect COP
- Rising COP will detrimental to living standards
2. Production in Australia
- Increase exports will lead to more goods and services produced in Australia
- Increase imports will lead to a decrease of goods and services produce in Australia

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thus affects living standards
3. Income in Australia
- Increase in income

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will lead to an increase of living standards
4. Capital assets
- Investment in Australian leads to an increase of growth rates and increase living standards
5. Spending in Australia
- Overseas borrowing can encourage spending as can income from overseas

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Free Trade
Definition:
Refers to removal of barriers of trade
- Tariffs
- Import quotas
- Local subsidies

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Advantages and Disadvantages
1. Advantages
- An increase in the supply market will offer more choice and variety
- Lower prices for consumers
- Increase in efficiency in production

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increase the GDP

Hint 7

increase in income

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2. Disadvantages
- An influx of cheap overseas goods and services will pressure the domestic producers out of production
- National sovereignty are threaten from foreign takeover of the agriculture sector
- Food industries are under threat from foreign takeover
- Infant industries are restricted to grow
- Can increase economic instability
- Weakens the national defence

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Effects of free trade
1. Domestic trade
- Increased the size of the market which in turn increase the production levels

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incomes and living standards
- Enables to be cost comparative in the market
- Can import what other nations are best at producing
- Easier access to imports at a cheaper price for domestic producers
2. Global trade
- Allow free market to determine the price and volume of trade
- Advantage to developed countries and developing countries
- Smaller economics are benefitted due to more resources to assist them to expand their economy
3. Living standards
- Can increase living standards if trade is left unhindered
- Giving countries the ability to gain better access of cheaper goods and services

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Relationship between CAD

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exchange rate and NFD
When AUD increases
- Exports decrease and import increase
- Repayments on foreign borrowing becomes cheaper
- As repayments are cheaper

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means lower NFD
- Increasing the CAD
When AUD decreases
- Export increase and import decreases
- Repayments on foreign borrowing becomes more expensive
- Decreases the CAD
- As repayments are more expensive

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Aggregate Demand and Supply factors
Aggregate Demand:
1. Changes in economic activity overseas and our terms of trade index
- Most recent 2012-13 that China

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Australia’s main trading partner are slowing down in economic growth

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and the end of the mining boom