External Stability - is the Tim Riley book good at explaining this? (1 Viewer)

[swifty13]

I am having a lot of trouble understanding External Stability, I use Tim Dixon's book at school. Does anyone who has the Tim Riley book think the external stability chapter in it is good and worth purchasing?

 

[gnrlies]

I am having a lot of trouble understanding External Stability, I use Tim Dixon's book at school. Does anyone who has the Tim Riley book think the external stability chapter in it is good and worth purchasing?

Dear Swifty,

External stability is can be thought of, broadly speaking, as a package of policy concerns relating to Australia's economic relationship with the rest of the world.

In terms of the HSC course, a number of issues come to mind:

Balance of payments
Foreign debt (including composition between portfolio and direct investment)
Exchange rates

etc.

They are of course all related. In fact the best framework through which to examine all of these issues is the balance of payments.

My personal opinion is that the balance of payments is poorly taught in schools and a big part of that is the approach taken in both the Riley and Dixon textbooks. In my opnion, the balance of payments is better understood by taking a more generalised, or theoretical approach. Instead these textbooks take a different approach which examines the technical aspects of the BOP from a national accounting perspective - this complicates things way more than it needs to be.

To assist, here is an anology:

Think about our country as though it is your own household. Here, a few simple observations can be noted:

1 - if you spend more than you earn in a given year then you have to either draw on your own savings or borrow (if you have no savings).
2 - if you spend less than you earn in a given year then you can either add to your savings, or you can repay debt (if you have a debt).

The balance of payments is really no different to this simple story, that is to say that:

If an economy consumes (or invests as it may be) more than it produces within a given year then it has to borrow from the rest of the world, or reduce the debts owed to it (if debts are owed).

Imports / exports / foreign investment / exchange rates etc are all mechanisms that support internation borrowing. When we export more than we import to one country, we are actually giving the equivalent of a loan to the other country. In this case we will have foreign currency that we can use to purchase goods from that country at a later time.

Of course all of this is complicated by the fact that there are many different economic actors that do not make collective decision, but the principles are the same.

In terms of external stability then, we can think about our own households in terms of what we regard to be 'stable'. I.e. you probably don't want to spend a lot more than you earn in a given year. A little bit here or there is okay, but not something that will be difficult to repay into the future. A clear example here is that of Greece - there is some concern that they may not be able to repay their loans as of 2012. In this case external stability is a problem.

Commonly however, external stability is not regarded to be a significant concern for governments. The reason is because these decisions are made by individuals, firms etc who are best placed to make a determination as to whether their speding is sustainable. Furthermore, it is the individuals themselves that suffer the consequences of any inability to do so, and not the country more broadly. So while one business may suffer, this will not spread to the rest of the economy. The case of Greece is slightly different because it is soverieign debt, i.e. government held debt, which is causing concern. If a government cannot repay debt, this will have significant consequences for the rest of the economy (including the governments own ability to borrow into the future). For Australia however, our soverign debt is not a concern. We have a AAA credit rating which indicates that we are held in high esteem within the international community.

 

[food123lover]

Thank you so much for that ^^^

 

[Ekman]

Tbh, I use the Tim Dixon as well, but I prefer the Tim Reily as it explains everything perfectly in a condensed manner.

 

[sy37]

Tbh, I use the Tim Dixon as well, but I prefer the Tim Reily as it explains everything perfectly in a condensed manner.

Tim Dixon is the one who explains everything in a condensed manner. Tim Riley is the one who likes to show off how much he knows.

 

[mreditor16]

Tbh, I use the Tim Dixon as well, but I prefer the Tim Reily as it explains everything perfectly in a condensed manner.

I would have to strongly disagree on that. Tim Riley's textbook is far from condensed. In fact, I would argue that Dixon's textbook is the more condense one. At the same time, I would not write off Tim Riley's textbook. It is a very useful textbook, which I encourage students to use in conjunction with the Dixon textbook. However, I would strongly advise students to use the Dixon textbook as their primary textbook!