Scribd
Upload
5 views

External Stability - Measurement

Uploaded by

Mostafa Chopan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
5 views

External Stability - Measurement

Uploaded by

Mostafa Chopan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 3

External Stability

Measurement

As our external stability is assessed by watching the fluctuations in three


different measures, each has its own manner of measurement.

The Exchange Rate


In 1983 when the Hawke government assumed power, one of the first decisions that was made was
to “float” the Australian dollar. Prior to this, the Australian dollar was pegged against movements
that were experienced by other countries. Floating the dollar meant that its value would be
determined by the supply of the dollar and the demand for the dollar in the foreign exchange
market (which you will often see called simply "the Forex market").

The float of the AUD is referred to as a “dirty float”. This is because the RBA is able to intervene in
the market for the AUD to affect its value. This could be done by buying AUD to restrict supply (if the
value appears too low), or by offering AUD for sale and increasing supply (if the value appears too
high). This will be covered in more detail in the section on monetary policy (Unit 4).

Movements in the value of the dollar are referred to as either an appreciation or a depreciation of
the currency. An appreciation is when the value of the Australian dollar (AUD) increases. That is, one
Australian dollar will now buy more of the other currency. On the other hand, a depreciation is said
to occur when the value of the AUD decreases – when one Australian dollar can no longer buy as
much of the foreign currency as it previously could. An example will make this clear.

Let us say that the value of the Australian dollar can be expressed as $1AUD = $0.72USD. In this case,
we are saying that one Australian dollar will buy 72cents in the USA. For some reason, the value of
the AUD changes, so that now we can say that $1AUD = $0.75USD. In this case, the AUD has
appreciated – we can buy more of the US currency with each AUD that we offer than we previously
could.

Fluctuations in the value of the dollar are determined by the forces of supply and demand. Demand
for the AUD will occur when people and organisations from overseas want to buy our currency. This
could be due to a high demand for our exports or a desire to invest in the Australian economy.
Supply of the AUD is created when our currency is available for sale on the Forex Market. This will
happen when our currency is used to purchase more from overseas than we buy, or when we
choose to use our local currency to purchase international currencies for investment overseas.

Australia’s exchange rate can either be expressed against one other currency (as we are used to
seeing in the newspaper) or against all of our trading partners at once. This is referred to as our
Trade Weighted Index, and it is a very important measure to use when considering our overall ability
to trade with all of our major trading partners.
Net Foreign Debt
Our net foreign debt (NFD) can be assessed in a number of ways. We accumulate debt when we
borrow from overseas to fund local projects. This can be expressed as either a percentage of GDP, or
as a raw figure. For example, we can say that in 2001/02 Australia’s NFD was 47% of our GDP for that
year. However, we can also say that in the same year our NFD was $313.5 billion, and our gross
foreign debt was $489.8 billion. We could also say that this represented a 12% increase on the
previous year.

Unlike our exchange rate, the level of NFD tends to increase every year. However, as our GDP will
also generally increase in most years, economists find it useful to express it as a percentage of GDP.
When expressed in this manner, analysts can see whether or not our economy is relying on debt to a
greater or lesser extent.

The Balance on Current Account


The balance on current account is one part of the Balance of Payments. In general we would assume
that the two sides of the Balance of Payments will “balance” each other out – if the current account
has a deficit balance of $25 billion, then the combined effects of the capital and financial accounts
will be a surplus of $25 billion.

The current account is made up of four sub-accounts:

 Net Merchandise – In this section we record the exports of goods and the imports of goods.
 Net Services – Here we record the import and export of services.
 Net Income – This is the section in which we record any movement of factor income in or
out of Australia. Most importantly, it is in this section that we record our payments of
interest on Net Foreign Debt, and it is for this reason that Australia has traditionally
maintained a deficit balance in the current account.
 Net Transfers – Finally, in this account we record any transfer payments between Australia
and another country. This section also includes gifts, taxes and some forms of foreign aid.

When calculating the balance on current account, exports are recorded as CREDITS, while imports
are recorded as DEBITS. As such, for each section we will calculate the credits minus the debits, and
then add the four sections together. The result will be our balance on current account.

On the other side of the Balance of Payments, it is also important to consider the capital and
financial accounts. Each account will record a different type of international financial transaction.

The Capital Account: This is where we record the net inflow of funds belonging to people who
permanently move from one country to another. We also record any movement of certain assets,
such as copyrights, patents, franchise holdings and trademarks.
The Financial Account: This account is made up of four main sections.

 Direct Investment – any purchase of 10% (or more) of a business between countries. That is,
if foreign interests buy more than 10% of a business that was previously 100% Australian
owned, it will be recorded here. Similarly, Australians can make direct investment decisions
about companies overseas.
 Portfolio Investment – another form of investment between countries. In this case, it is
usually in the form of share purchases, and it is recorded here when the total purchase is
less than 10% of the business.
 Other investment – here we record any investment that does not fit into the other
categories. For example, trade credits are recorded here. (The reality is that this is not a
large section.)
 Reserve Assets – Sometimes governments and central banks will trade, and this trade is
recorded here. Statisticians will record dealings in gold, foreign currencies and other
international financial transactions.

After all of this it is very unlikely that the two sides of the BoP will actually balance. This is because
there are many estimates involved in the calculations. As a result, a separate account called “Net
Errors and Omissions” is listed. This account is simply a balancing figure, used to ensure the two
sides really do match. As the title suggests, it accounts for any figures which were estimated
incorrectly, or figures that were overlooked during the calculation.

You might also like