Structural Change in the Australian Economy - Statistics Project Example

Macroeconomics Name Course Name and Code Date Outline the experience of the Australian economy over the last 10-15 years, making use of major macroeconomic aggregates– these may be presented in summary tables and/or graphs. Stress should be placed on the challenges facing policy makers at present and likely challenges in 2012 Macroeconomics analyses economy of a given region or state as a whole rather than analysing individual markets. This branch deals with structure, performance, decision-making and behaviour of economic situation (Garnett and Hawtrey, 2010). Some of the factors on macroeconomics include inflation, GDP, and unemployment. Macroeconomists collects and develop models that are aimed at analysing a situation and determine the direction of economy. The Australian economy survived the financial crisis of 2008 because of effective approach to the problem and provided solutions that ensured the economy operated effectively. Some of the factors that drive the economy and determine the direction of the economy include inflation, employment and gross domestic product. The following table presents a summary of inflation rates since 2003. Year March Jun Sep Dec Annual 2013 2.5 2012 1.6 1.2 2 2.2 1.7 2011 3.3 3.5 3.4 3 3.3 2010 2.9 3.1 2.9 2.8 2.9 2009 2.4 1.4 1.2 2.1 1.7 2008 4.3 4.4 5 3.7 4.4 2007 2.5 2.1 1.8 2.9 2.3 2006 2.9 4 4 3.3 3.5 2005 2.4 2.5 3.1 2.8 2.7 2004 2 2.5 2.3 2.5 2.3 2003 3.3 2.6 2.6 2.4 2.7 Source (RateInflation, 2013) Inflation is the general increase in the cost of services and goods in an economy over a given time. When the prices of the products and services increases, the amount of money required would also increase meaning fewer goods or services can be purchased at the current value comparable to before. Inflation affects the economy both negatively and positively. Negative effects include hoarding of goods and opportunity cost increase. The positive effects include encourage of investment and adjustment of real interest rates. The aim of the Reserve Bank of Australia is to keep the inflation rates at between 2% and 3%. This goal has been maintained except in 2006, 2008 and 2011. The inflation in 2008 may be attributed to global financial crisis. The policy makers should introduce measures since the inflation of 2.5% in the month of March is higher if compared to the same period in 2012. The new measures should factor into consideration other macroeconomic aggregates such as unemployment. Unemployment occurs when there are people seeking for work but there are no available vacancies. Unemployment rate is usually utilised in measuring the prevalence of unemployment through dividing the unemployed people by all people who are currently working. The causes, solutions and consequences of unemployment are debatable and can be analysed from different perspectives including Austrian School of thought, New classical economics and classical economics. The unemployment rate was highest in 2003 with 5.942% and since then it has decreased until 2008 (Index Mundi, 2013). The rise in unemployment rates in 2009 might be attributed to the global financial crisis. Nevertheless, the unemployment rate decreased afterwards because of the improvement in economy attributed to policy formulation and implementation after the crisis. The policy makers on unemployment face demanding tasks such as the increase in unemployment in the month of March to 5.6% from 5.4% in the month of February. It is important for the policy makers to formulate measures to curb rising unemployment rates. The following table summaries the unemployment rates for the last ten years. Year Unemployment rate Percent change 2013 5.6 (as of March) 2012 5.2 2011 5.1 2010 5.233 -6.42 2009 5.592 31.33 2008 4.258 -2.50 2007 4.367 -8.70 2006 4.783 -5.44 2005 5.058 -6.19 2004 5.392 -9.26 2003 5.942 -6.79 Source: (Index Mundi, 2013) The Gross Domestic Product (GDP) Gross domestic product is the market value of formal services and goods a country produces within a given period. GDP per capita is normally utilised as an indicator in gauging the living standards within a country. GDP is important component in macroeconomics since it determines the direction in which the country grows economically. The GDP of Australia was lowest in 2009 after the global financial crisis but since then, the economy has been growing considerable as indicated in the following table. Year Real GDP Growth 2012 3.3 2011 2.3 2010 2.4 2009 1.5 2008 2.2 2007 4.9 Source: (The Market Information and Research Section, 2013) Instruments and targets in macroeconomic policy and how this concept might be applied to the current policy framework in Australia Macroeconomic policy instruments refer to quantities that are analysed from macroeconomic perspective and they can easily be controlled and manipulated by economic policy maker. These instruments can be viewed from two subsets, which are fiscal policy instruments and monetary policy instruments. Monetary policy is usually developed by a central bank of a country and/or supranational region such as the Euro zone. On the other hand, fiscal policy is usually conducted by legislative or executive branches of any government with the aim of managing national budget. Targets refer to outcome that the policies aim to achieve. Monetary policy instruments are aimed in managing rates that occurs within short periods. Moreover, the monetary policy allows a government to set reserve requirements for banks. A government can employ two strategies in formulating and implementing monetary policy, which are restrictive for the economy and/or expansive for the economy. The aim of monetary policy is aimed at curbing or managing domestic inflation. The Reserve Bank defines and sets the monetary policy for Australia. The Reserve Bank sets the interest rate on overnight loans since such approach would influence interest rates, which are applicable to the economy. This strategy would affect the economic activity, the behaviour of leaders and borrowers resulting in lowering the inflation of Australia. The Reserve Bank determination of monetary policy is premised on maintaining full employment, price stability and the economic welfare and prosperity of inhabitants of Australia. The Reserve Bank targets to seek and ensure the inflation rate is between 2 and 3 per cent on average. The aim of maintaining and preserving this rate is to improve the value of money ensuring sustainable economic growth for a longer period. Fiscal policy is based on the national budget through planning and financing of the budget with the aim of influencing economic activity. This includes contraction or expansion of government expenditures such as infrastructure, social welfare programs and buildings of roads. In addition, it includes taxes collection with the aim of implementing government programs. The consequence of interest rates fiscal policy is important because it affects the Australia economy is short and long periods. Australia government regulates the fiscal policy with the aim of fulfilling short term requirements while ensuring the economy grows. The instruments are also directly associated with the anticipated outcome. For example, the Reserve Bank of Australia aims to make inflation stay between 2% and 3% and this can be achieved through formulating and implementing policies towards ensuring this requirement is fulfilled. To achieve this requirement, both the government and other regulatory systems have incorporated factors and stances that aim at ensuring achievement of targets. In addition, the Reserve Bank of Australia may introduce monetary policy that aims to reduce the rate of inflation or value of money. For example, the government can increase overnight banking rates to reduce the amount of cash available and hence reduction in expenditure. This approach could ensure the targeted inflation rate is achieved based on the policy embraced. Show how the economic theory you have learnt can be used to explain current macroeconomic policy The government of Australia has aimed to achieve three important objectives, which are internal balance, economic growth and external balance. Factoring into consideration these three components aims to make the economy to grow and also maintaining low inflation while minimising liabilities and foreign debts (McLean, 2012). The economy of a country is not constant but faced by numerous challenges and requires effective management and this can be achieved through analysing and influencing macroeconomics. Managing microeconomics allows for lowering unemployment and inflation. Microeconomics can be viewed from two perspectives which are demand side nature and supply side nature. The two perspectives works concurrently with the aim of influencing demand, and this is only possible through formulation of policies by governments. Such policies include fiscal and monetary policy. Government utilise fiscal policy in developing the government’s budget with aim of influencing economic objectives through varying the revenue and spending in governments. Budgets usually influence the economy and the economy itself influences the budget outcomes (Bayari, 2012). The budget creation is based on cyclical component and structural component. A budget that is based on these two factors and other macroeconomic factors ensure the economy grows. When a government aims to stimulate growth, expansionary fiscal strategy is employed and it is done through reducing taxation and government spending resulting in multiplier increase based on Keynes’ multiplier process (Connolly and Lewis, 2010). On the other hand, contractionary fiscal strategy is aimed at slowing the economy and is aimed at limiting Current Account Deficit and foreign liabilities. In addition, the distribution of income defines the direction of utilisation of resources and this also affects the fiscal direction. The government of Australia also utilises monetary policy to influence availability of money and cost within the economy. The aim of monetary policy is to have an internal balance through influence of interest rates by using domestic market operations such as purchase and sale of government bonds, correcting surplus or shortage of funds (Battellino, 2010). The RBA loosens the monetary policy through purchasing of bonds with the aim of creating excess liquidity, allowing investment and consumer spending, pressuring the cost of interest rates resulting in lowering of unemployment. Conversely, tightened monetary policy is aimed at reducing inflationary pressures through selling of bonds resulting in pushing up of interest rates and hence reduction of expenditure (Crotty and Roberts, 2009). The target of Reserve Bank of Australia is to maintain the inflation at 2-3% and this can be achieved through loosening and tightening of monetary policy. In addition, a central bank can influence the exchange rate with the aim of maintaining stability without altering monetary policy strategy. Understanding and utilisation of macroeconomic policies impacts of the economy and introducing fiscal policy stance has helped the Australia government to control government and improve on national savings in order to maintain external stability, manage external factors under control and providing economic growth environment (Ciro, Mascitelli and Muthaly, 2009). The Australia government also understands the benefits associated with private sector investment and savings and therefore has encouraged foreign direct investments and capital importation nation. Therefore, government’s participation in macroeconomic policy mix is important in ensuring the economy grows (Russell-smith, Whitehead and Cooke, 2009). Microeconomic reform contributes to growth of the economy ensuring that it creates a multiplier effect, which can be felt across board. Macro policies are important in analysing and understanding supply-side constraints and demand side constraints. However, fiscal and monetary policies are not instantaneous in its applications but takes time such as between 6-18 months for monetary based policy. Nevertheless, a policy that aims to reduce the inflation rate is important because it is the main option that drives other macroeconomics aggregates such as employment and GDP. It is apparent microeconomics plays a major role in ensuring the economy operates optimally. Numerous factors are associated with growth in economy including participation of the government in the process determines the direction in which the economy should follow. For example, the government of Australia through Reserve Bank of Australia has developed monetary regulations and also has shaped up fiscal policy towards ensuring the economy grows. Refining the monetary and fiscal policies contributes to reduction of inflation, increase in employment and general growth of the economy. References Battellino, R. 2010. Mining Booms and the Australian Economy. Address to the Sydney Institute, Sydney. Available at http://www.rba.gov.au/publications/bulletin/2010/mar/pdf/bu-0310.pdf#page=65 Bayari, C. 2012. Australian Economy and Neo-Liberalism: Manufacturing, Trade and Bilateral Links With Japan in the Post-Keynesian Age. London: LIT Verlag Münster Ciro, T., Mascitelli, B., and Muthaly, S. 2009. Australia and the Global Economy. Sydney: Connor Court Publishing Pty Limited Connolly, E., and Lewis, C. (September 2010). Structural Change in the Australian Economy. Available at http://www-ho.rba.gov.au/publications/bulletin/2010/sep/pdf/bu-0910.pdf#page=3 Crotty, M., and Roberts, D. 2009. Turning points in Australian history. Queensland: UNSW Press Garnett, A., and Hawtrey, K. 2010. The Australian Economy: Your Guide. Sydney: Pearson Education Australia Index Mundi. 2013. Australia Unemployment Rate. Available at http://www.indexmundi.com/australia/unemployment_rate.html McLean, I. 2012. Why Australia Prospered: The Shifting Sources of Economic Growth. Princeton: Princeton University Press RateInflation. 2013. Australian Inflation Rate History – 2003 to 2013. Available at http://www.rateinflation.com/inflation-rate/australia-historical-inflation-rate Reserve Bank of Australia. 2013. Monetary Policy. Available at http://www.rba.gov.au/monetary-policy/ Russell-smith, J., Whitehead, P., and Cooke, P. 2009. Culture, Ecology and Economy of Fire Management in Northern Australian Savannas: Rekindling the Wurrk Tradition. Victoria: Csiro Publishing The Market Information and Research Section. 2013. Australia: Fact Sheet. Available at http://www.dfat.gov.au/geo/fs/aust.pdf Read More