Essay about Fluctuations in External Stability

Words: 1626
Pages: 7

Economics PAT

“Analyse the causes and effects of fluctuations in Australia’s external stability”.

Achieving external stability is an important objective of economic policy, achieving this stability ensures that imbalances in Australia’s economic relationships with other economies do not hinder achieving domestic economic policy goals such as lower rate of unemployment, higher rate of growth and lower inflation. There are three main factors that effect external stability the deficit on the current account (CAD), net foreign liabilities and the Australian dollar. Australia’s experienced times when overseas investors decided that the economy’s external position was unstable, and when investors like such decide to withdraw their
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If international financial markets loose confidence in Australia, our credit rating may be reduced which would lead to high interest rates and make funds from other countries a lot harder to obtain.

The main drive behind foreign equity has been foreign investment in minerals and resources sector, when investors buy assets within Australia its recorded as an increase in foreign equity, the problem with this is that foreign equity attracts servicing costs in the form of profits and dividends which are returned to overseas investors. Equity servicing costs account for around half of total primary income outflows. Whilst there are disadvantages with high levels of foreign ownership, the sustainability of equity servicing is of less concern then debt servicing because dividends are sent overseas when an Australian asset or business is generating a profitable return, while interest payments on debt must be paid regardless of whether there is a profit.

With foreign debt and equity levels another trend must be factored in which is the large rise in Australian investment overseas and the growth of other countries liabilities to Australia. In 2010-11 Australia’s level of foreign assets increased from $494 billion to $1,253 billion and ownership of equity overseas rose from $295 billion to $629 billion during this period, whilst our loans to overseas countries grew from $198 billion to $625 billion. These