Recent Economic Growth Patterns in Australia - Example

Student Name Instructor’s Name Course Name Date Essay Question: Describe the main phases of the business cycle and discuss recent economic growth patterns in Australia. Introduction: Economic growth worldwide has always been marred by periods of economic instability, at various occasions growth has given way to recession. These ups and downs in the economic activity are jointly known as the Business Cycle. The Business Cycle is not a regular, expected, or recurring occurrence like the swing of the pendulum in a clock. Its timing is quite random and difficult if not impossible to predict. These altering rise and decline in the level of economic growth usually extend over several years. And this trend is universal for all the world’s economies. This very situation has been the case with the Australian economy as well, however based on strong foundations ad due to the progressive policies of the government, the economy has recorded an overall rising trend for more than the whole of the last decade. Phases in a Business Cycle: Noted economists and author of several books on Economics, Parkin and Bade gave the following definition of a business cycle: “The business cycle is the periodic but irregular up-and-down movements in economic activity, measured by fluctuations in real GDP and other macroeconomic variables.” (Parkin and Bade, 17) The business cycle is comprised of four phases, as given in figure (Rapp, Four phases of business cycle) below: Peak: In this phase economic growth is at its peak; businesses are doing excellent, making profits and presenting record sales. Demand is definitely more then production, there are ample opportunities for employment, and “… level of real output is at or very close to the economy’s capacity. The price level is likely to rise during this phase” (McConnell, Brue; 134). But this increase in prices is not considered a serious problem or threat to economy, as there are plenty of jobs and pays are sufficient. Contraction: The peak is followed by contraction; contraction is a gradual period/process of decline or slowdown. It is marked by decline in output being generated by the economy, a decrease in number of jobs, profits, trade and average income. “Surpluses are everywhere: product inventories are bulging, excess capacity causes newly purchased equipment to turn idle, banks have loan-able moneys that no project justifies, raw materials are not needed, and employees are too many. Lay-offs become widespread. Shrinking revenues force companies to replace full-time employees” … “or even to ask for wage concessions from the existing staff. Decreasing disposable income causes even more reduction in product demand. Companies are forced to cut prices. Revenues disappear and profits turn to losses. Businesses default on their loans. Highly leverages companies close down. These are bankruptcies of large operations. In turn, these bankruptcies can cause some banks to close as well”(Phases of business cycle; PEOI: Professional Educational Organization International; par. 4). Different terms are used interchangeably for contractions; i.e. recession, depression (worst type of contraction), and downswing etc. Trough: When a contraction is at lowest possible status; it is called a trough (as a trough in a cycle). A trough is also the turning point of the business cycle; the economic activity has reached it lowest possible value and it can only indicate end of contraction and beginning of expansion. The trough phase can either be over very quickly; or it could stretch for a considerable period of time. “A peak marks the end of an expansion and the beginning of a contraction, while a trough marks the end of a contraction and the beginning of an expansion.” (Business Cycle; Microsoft® Encarta® Online Encyclopedia 2008). Expansion: This is phase of recovery; after experiencing lowest ebb the economy is ready to experience a boost. In expansion investors and businesses gain their confidence back and explore the production of new goods and services, increase their work force and expand the business by acquiring loans. On the other hand consumers are more willing to purchase products and services and this is complimented by readily available jobs and overall increase in salary structures. Rationalization for Business Cycles: The economists have come up with number of rationalizations to explain this fluctuation of economy. “Joseph Schumpeter published his innovation theory in the late 1930s. In the early 1960s American economist Milton Friedman offered another explanation of the business cycle, known as a monetarist theory. Friedman and his collaborator Anna Schwartz found that turning points in the growth rate of the money supply (the total amount of money circulating in the economy) preceded business cycle turning points. Edward Tufte, have argued that politics plays a major role in the business cycle. American economist Robert E. Lucas, Jr., and others, examines misperceptions about the movements of wages and prices. A fifth explanation for business cycles is known as real business cycle theory and was developed in the 1980s by American economist Edward C. Prescott and others. It looks beyond political, monetary, and perception considerations to “real” factors, such as significant changes in technology and productivity.” (Business Cycle; Microsoft® Encarta® Online Encyclopedia 2008) Another interesting aspect affecting the economy thus causing a business could be the political de-stability or some other political factor. Economic Growth in Australia: All the major economies in the world go through different phases of the business cycle, it’s a universal phenomenon. But in the prospering economies the over-all trend is uphill, i.e. despite contractions, there is an overall increase in the economic growth rate. Similarly Australia’s economy is an important part of world’s economy, as explained by David Meredith and Barrie Dyster, author of “Australia in the Global Economy: Continuity and Change”. In this book they have meticulously described in a step by step manner Australian economic development with respect to the worldwide political and social situation and occurrences (27-301). They have argued that the Australian economy is susceptible to the same trends that are present across the globe. (27, 77, 147, 225, 281) The book also enumerates the domestic factors that have paved way for the growth of the Australian economy, such as the increasing number of exports, the role of foreign capital, and the positive contribution of migrants. (192, 243) Australian Government boasts of having a strong growth rate and a robust economy. As quoted on the Department of Foreign Affairs and Trade’s (Government of Australia) website: “Australia has recorded 17 consecutive years of economic growth since 1992 – averaging 3.3 per cent a year” … “Australia is forecast to grow again at 2.75 per cent in 2008-09 which is above the average growth rate members of the Organization of Economic Cooperation and Development (OECD) of 2.2 per cent.” Also from the same source “According to the World Bank, a new business can be established in Australia within two days compared with an OECD average of 20 days.” … “Australia ranks first in the Asia-Pacific region for labour, agricultural and industrial productivity per person employed, according to the IMD World Competitiveness Yearbook. The 2006 OECD Economic Survey noted that living standards in Australia surpass those of all Group of Eight countries except the United States.”(Department of Foreign Affairs & Trade; Australia in Brief: A stable and competitive economy par. 1, 4, 3, 11, 19). The image (OECD; 3) above is taken from the Economic Survey by Organization for Economic Co-operation and Development. The above image clearly indicates an overall increase in GDP of Australia since 1990’s, irrespective of few contractions during this period the over all trend is of increase in the GDP. This boost in economy is credited to timely reforms by the government and investment and co-operation by the private sector. Reforms have also helped in enhancing the productivity, living standards, controlling the rate of inflation and elimination of general government net debt. Also as reported in Economic Survey by OECD: “The greater flexibility engendered by these reforms, together with the introduction of robust monetary and fiscal policy frameworks, has also bolstered the economy’s resilience to a series of major shocks over the last decade: the Asian crisis in the late 1990s, the global downturn at the turn of the millennium, followed by a major drought, the ending of a house price boom and currently, the commodity price boom.”(OECD, 3) Conclusion: Political factors and social modalities affect the economic growths and business cycles of any economy. The economic indicators and variables are basically the factors through which the peaks and troughs of the business cycle are measured. But these cycles are the most fundamental parts of any economy and so they are of Australia’s economy. However, being based on strong foundations, Australian economy has sustained the shocks of the troughs and has benefited from its peaks. Work Cited: Bade, Robin and Parkin, Michael. Economics. Addison-Wesley Longman, 1997. Rapp, John. University of Dayton. Four Phases of a business cycle ECO 204 ­­‑ Part Two Notes Meredith, David and Dyster, Barrie. Australia in the Global Economy. Cambridge University Press, 1999 McConnell, Campbell R. and Brue, Stanley L. Economics: Principles, Problems, and Policies. McGraw-Hill Professional, 2004 “Phases of business cycle.” PEOI: Professional Educational Organization International. “Business Cycle,” Microsoft® Encarta® Online Encyclopedia 2008 http://encarta.msn.com © 1997-2008 Microsoft Corporation. All Rights Reserved. Australian Department of Foreign Affairs and Trade. April 2008. Australian Government. September 2008. Organization for Economic Co-operation and Development. Economic Survey for Australia, 2006. Read More