It's two different animals. Increasing RAM helps your processor and can significally speed up your MacBook, if you're using RAM-hungry apps (e.g. image editing, video editing etc.). Using an external hd will give you more storage for files.
What you need more only you can say.
If the choice is a bigger internal or an external drive I'd go for an internal, as long as you don't need the speed that an internal flash drive can give. If that is the case, I'd chose an internal flash drive just for system and apps and an external for files.
Or, if you can, swap the optical drive for a second hd and use an external optical drive (which is in most cases used much less than storage space).