Quick questions on External stability in Australia: the CAD, net foreign liabilities, terms of trade and the exchange rate (HSC Economics Topic 3)

External stability refers to avoiding excessive fluctuations in Australia's external accounts and exchange rate, so the economy can service its foreign obligations and avoid a sharp, disorderly currency depreciation. The main indicators are the CAD, net foreign liabilities, the terms of trade and the exchange rate.

Net foreign liabilities (NFL) measure the total stock of what Australia owes the rest of the world, net of what Australians own overseas. NFL has two components:

The terms of trade measures the ratio of export prices to import prices:

Australia has operated a floating exchange rate since 1983, meaning the Australian dollar's value is determined by market supply and demand rather than fixed by the government or the RBA. Key drivers of the AUD include the terms of trade, relative interest rates (higher Australian rates attract foreign capital, appreciating the dollar), and general market confidence in the Australian economy.

A NESA marker checks whether you recognise that equity investment shares risk with foreigners while debt must be repaid regardless; conflating the two caps an "assess the CAD" response mid-band.

Naming the floating exchange rate's self-correcting role (a widening CAD depreciates the dollar, which improves competitiveness and narrows the deficit) is the clearest way to show examiner-level understanding beyond describing the CAD in isolation.