welcome to HSC economics made easy as the channel name suggests my goal is to make difficult Concepts easy for you to understand and one topic that students often find challenging is external stability in this video I want to give an overview of this topic and how it could appear in HSC exams all right let's start with the definition what is external stability external stability or external balance is the economic objective concerned with making making sure that our foreign obligations are sustainable that they're not too risky or volatile we can find out more about what we need to learn by looking at the syllabus the topic of external stability comes in topic three of the syllabus in the syllabus we can see that the indicators of external stability include the current account deficit as a percentage of GDP net foreign debt net foreign liabilities terms of trade exchange rate and international competitiveness for each of these topics we need to know the trends as well as the causes and effect X if you have already studied topic 2 some of these Concepts will be very familiar you would have learned that the current account is an account in the balance of payments that records non-reversible incomes if you want to learn more about that you can watch my balance of payments playlist a key Trend that you would want to know about Australia's current account is that it tends to be in a deficit driven by structural factors in the bogs and npy account again I've got videos explaining these structural factors on the other hand a recent Trend that you'll need to be aware of is that Australia turned the 44-year deficit around with a current account Surplus in September 2019 this has mostly been driven by cyclical factors including an iron or boom as well as a higher savings ratio and lower interest rate differentials during covid-19 again to better understand these you could check out my videos about the influences on bogs and npy terms of trade is also explored as a cyclical influence of bugs on those videos as well but as a quick recap the turns of trade measures the movement of export prices relative to import prices in recent years Australia's terms of trade has been mostly driven by demand for Australian mining resources when there is high demand commodity prices increase driving up export prices resulting in an improved terms of trade by the way it's no coincidence that these terms of trade Trends correlate with bogs they're both driven by export demand International competitiveness is another concept that you would have covered in topic two it's a structural influence on bogs meaning that it has an ongoing influence when we lack International competitiveness it means that we receive less export revenue and are more likely to spend more on Imports resulting in a bogs deficit if you remove the commodity booms and observe the long-term Trend you'll see that bogs tends to be in deficit and this can be largely attributed to Australia's lack of international competitiveness the causes for this lack of international competitiveness includes Australia's High labor costs and low productivity as well as cyclical factors like an appreciating Australian see my video on structural factors on bugs for more detail speaking of which another aspect of external stability that we must explore is exchange rates the exchange rate refers to the value of Australia's dollar expressed in relation to another country's currency similarly to the trends in the current account Trends in Australia's exchange rate has mostly been driven by demand for commodity exports and Australia's interest rate differentials check out my playlist on exchange rates for more detail all right that content should have been pretty familiar but here's some new content net foreign liabilities and its relationship with foreign debt and foreign Equity first some definitions debt refers to loans Equity refers to the ownership of assets buying and selling shares would be examples of equity flows because Shares are entitlements to own assets or companies liabilities refers to the sum of debt and Equity now that you know the definition of these terms I want to bring your attention to the word net whenever you see this word it means that something has been subtracted in this context net means that we're measuring the money flowing in minus the money flowing out so when we say net debt we mean all the debt borrowed that's come into Australia minus all the debt that we're lending out and when we say net Equity we mean all the foreign money that's come in to buy ownership of Australian assets minus the money that we have sent overseas to own assets abroad net foreign liabilities is the sum of net foreign debt and net foreign Equity or you could see it as all the debt and Equity inflows minus the debt and Equity outflows these formulas will help you with such HSC questions as 2019s question 12 to calculate the net foreign liability as a percentage of GDP you would have to add up the net foreign debt and equity and then divide it by GDP this will give you the answer D 2016's question 19 is a bit more complex but it's a matter of figuring out which ones are inflows and outflows them running the figures through the formula loans owed by foreigners to Australians is a debt that we're lending outwards loans owed by Australians to foreigners is debt that is Flowing inwards foreign assets owned by foreigners involves money flowing into Australia and this last category involves money flowing outwards to buy foreign assets so if we take the inflows minus the outflows net foreign liabilities add up to $300 billion the answer is a now let's talk Trends the General Trend in Australia's net foreign liabilities is that it is a positive figure which means that we tend to take on more debt and Equity than we lend and invest abroad this grew rapidly in the 1980s to the late 2010s this is clearly led by Australia's growth in foreign debt and what are the effects of these Trends it could lead to worsen investor confidence exchange rate volatility and the debt trap scenario I explained those in my video on consequences of a cad however it is worth noting that more recently Australia's net foreign liabilities have fallen sharply to 32% of GDP which is the lowest level since the mid 1980s let me give you three factors that have contributed to this trend number one even since before the co recession consumer and investor confidence has been low and as you can imagine Co exacerbated this even further causing Australia's savings levels to increase and even exceed investment this resulted in us borrowing less from overseas and investing more overseas number two related to this trend is low interest rates in Australia this has made lending and investing in Australia less attractive to foreign investors number three Australians are investing more in foreign equity in fact net foreign Equity has been a negative number lately you know what this means we're investing in equity even more than we're receiving it also helps that Australian dollar has been depreciating because this means that assets we own overseas increase in relative value when Den in Australian dollars this is called the valuation effect now I know that that is a lot of content to take in but we're not done let's talk about how to approach this topic if it appears in an exam now I pointed out earlier that there are six dot points under external stability in the syllabus but in my experience as a HSC marker you never have to talk about all of them at once for example this question from 2010's HSC paper requires you to explore the causes and effects of fluctuations in Australia's external stability does does this mean you should write six paragraphs to address each of the syllabus dot points in my experience as a HC marker no you won't have time and it's possible to get full marks without talking about all six if you've seen my video on writing extended responses you know that my general advice is to only have two to four main points or sections so in this question I would suggest splitting your essay into two parts one half focusing on foreign liabilities and the other half focusing on the current account you could bring in the other subtopics within these two ctions for example you can talk about how exchange rates have caused fluctuations in the value of our foreign equity and liabilities you could also bring up how International competitiveness has caused Trends in the bogs and current account and how bogs fluctuations can affect Australia's terms of trade the point is you don't have to talk about all points equally in essays if you'd like more help with complex essays like this one considering contacting me for tutoring I can make this easy for you by creating essay structures with you as well as updating you with relevant Trends and stats this will help to maximize your marks in the exam and while we're talking about essays the next video is going to be a continuation of this topic specifically I'm going to be looking at the relationship between economic policies and external stability hey it's becoming a very popular question in the HSC exam so make sure you watch that video when it comes out and just again this video has been an overview of external stability there are a lot more details that I couldn't cover in a short video make sure you get the full picture by watching the related videos better yet do the worksheets from from my workbook it's got exercises and Sample answers to help you better understand these complex Concepts as well as improve your writing style order it from my website linked below 100% of proceeds will go to charity and if this video has helped you please leave a like and comment as well as share the video make sure you subscribe to this Channel and follow me on my socials to make sure you don't miss out on the next video and other new resources and I look forward to continuing to make HC economics easy for you see you next time n [Music]