You cannot install an operating system on an external harddrive (well you can try, but it wont boot from it
) because the HD is connect via USB and not connected to the IDE/SATA port on the motherboard.
I use my WD external for storage and such (mainly movies and music - all of which I own). Or if i need to some spring cleaning, I'll transfer important files to there and reinstall the OS to clean all the junk out.