The size of the CAD as a percentage of GDP is the best measurement of external stability. If CAD as a percentage of GDP rises above 5% this is seen as externally unstable as it results in
- The net foreign debt rising quickly
- Increased capital inflow require to finance the CAD and
- Debt servicing becomes more difficult
As of the 2003-04 financial year the CAD was $46.7bn, which was 5.5% of GDP meaning that Australia's economy was becoming more externally unstable as foreign debt, and capital inflow are increasing and servicing the debt becoming harder to achieve.
The size of Australia's net foreign debt as a percentage of GDP is another way of measuring external stability. Economists usually consider net debt in excess of 40% of GDP as an indicator that net foreign debt is very high and may become unsustainable - in that the interest rate repayments on the debt are too large to sustain. As of December 2004, Australia's net foreign debt was $421.9bn or 51.1% of GDP meaning that interest repayments would be becoming unable to manage. However nearly all of that debt is private debt so the government is unable to reduce anything except for their $16.3bn part of the debt, which is only 1.9% of GDP.
The value of the Australian dollar compared to the country of which our repayments on debt are owed to can also determine our external stability. Since the debts accumulated by Australian are in foreign currencies (E.g. $US) the principle and interest owed to the foreign country has to be paid back in their currency. When our dollar appreciates this means that more of the debt can be repaid for the same amount of money than if the dollar was depreciating. Appreciation usually occurs when economic growth is strong and is accompanied by decrease in CAD, increase in net capital inflow or increased confidence in Australian dollar while depreciation occurs when economic growth is falling, CAD is increasing, and there is a decline in net capital inflow. Below in
Diagram 1
The Australian currency exchange rates for 27/05/05. This means that for every $1 owe to the US we have to pay $1.31182 Australian dollars.
- American Dollar:
0.7623,
1.31182
- Brazilian Real:
1.82647,
0.547504
- British Pound:
0.418226,
2.39105
- Canadian Dollar:
0.959354,
1.04237
- Chinese Yuan:
6.30917,
0.158499
- Danish Krone:
4.51304,
0.22158
- Euro:
0.606541,
1.64869
- Hong Kong Dollar:
5.92818,
0.168686
- Indian Rupee:
33.0914,
0.0302193
- Japanese Yen:
82.2369,
0.01216
- Malaysian Ringgit:
2.89674,
0.345216
- Mexican Peso:
8.29763,
0.120516
- New Zealand Dollar:
1.06735,
0.936901
- Norwegian Kroner:
4.84228,
0.206514
- Singapore Dollar:
1.26473,
0.790682
South African Rand:
5.0045,
0.19982
- South Korean Won:
762.3,
0.00131182
- Sri Lanka Rupee:
76.1919,
0.0131248
- Swedish Krona:
5.57576,
0.179348
- Swiss Franc:
0.939458,
1.06444
- Taiwan Dollar:
23.8524,
0.0419246
- Thai Baht:
30.7817,
0.0324869
- Venezuelan Bolivar:
1634.83,
0.000611685
The Distribution of Income
Economic growth raises living standards by providing more goods and services for consumption. However, not all people in the community benefit from economic growth. Sometimes the benefits of economic growth flow to one particular group in society. This inequality of income can result in many social and economic costs to the community in which it occurs. These social and economical costs include:
- Discouraging people who have little opportunity to improve their skill
- Employees working harder and longer
- Insistence on labor mobility
- Production of failed entrepreneurs
- Creation of unequal savings
- Higher levels of crime and therefore criminal judgment cost
- Health problems for those in the lowest percentile who can't afford medical supplies
- Increase social welfare costs for the government who have to support those who can't earn their own wage or are part of the working poor in which they don't earn enough cover their basic needs
- Higher costs for policing to control increases in crime
The Gini Co-efficient, which is a precise measuring the income distribution, has been used to measure inequality levels and compare changes over time or between countries and regions of the world. A measurement of 0 means that everyone in the economy shares the same amount of income while a measurement of 1 would mean that just one household holds the whole amount of income for the country.
As shown in Diagram 3 below, Australia's Gini Co-efficient is 0.352 for 2004, which has increased from the levels in 1997-98 of 0.302 and 0.295 in 1989. This indicates that although economic growth is occurring at high rates over the 25-year period, the distribution of this income has gone towards the high-income earners and therefore has increased the gap between rich and poor. Also in Diagram 3, one can notice that although our Gini-coefficient is half the size of that of countries like Namibia there is still large improvements that can be made to get to the size of Denmark's or Hungary's Gini-coefficient.
