Macroeconomic Policy in Australia - Statistics Project Example

Running Head: MACROECONOMIC POLICY IN AUSTRALIA Macroeconomic Policy in Australia Name Institution Professor Course Date Macroeconomic Policy in Australia Australian economy is determined by various macroeconomic aggregates. It’s mainly dominated by its services sector although agricultural and mining sectors contribute to most of its exports. Its advantage in the export of products reflects the natural wealth present in the Australian continent as well as its domestic market (Drake, 1988). Around 25 million people occupy Australia continent. The size of the manufacturing sector has been on the decline for many decades, but has started growing steadily at a GDP rate of 8.5%. The global economic recovery is having an impact on the prices of Australia’s exports. Australia has experienced a lot of structural reforms in its economy since the early 1980s. It has transformed from highly protected and regulated marketplace to an open and competitive economy that is export oriented. Some of the major economic reforms include reduction of high tariffs which have been a barrier for free trade, floating of the Australian dollar, stooping the regulation of the financial sector, increasing flexibility in the job market (Mishkin, 2004). Many of the government-owned monopolies have also been privatized to increase efficiency. Australia has also experienced reforms in the taxation system which has seen the introduction of a broad-based Goods and Services Tax (GST) and reductions in the income tax rates. Australia is considered to be among the countries in the G7 with the highest standards of living. Its economic standings in the world market reflect the commitment to practice best macroeconomic policies. One such policy has delegated the regulation of monetary policy to the independent Reserve Bank of Australia. Economy is on a high recovery path with GDP expected to grow by 3.25% in the years 2010 and 2011 and at 47% in 2011 and 2012. This will lead to a reduction in unemployment rate. Net debt is also expected at 6.1% of GDP in 2011 and 2012, a figure low than the previous forecast of 9.6 % of GDP. The unemployment rate is expected to reduce from 5.3% experienced in 2010 to 5% in 2011 and 4.75% in 2012. The Australian government has seen the need to invest heavily in transport, water, ports, telecommunications, and education infrastructure in order to expand Australia’s supply capacity. The Australian government has also developed a plan aimed at improving irrigation infrastructure especially in the Murray-Darling river system (Spoehr, 2005). The government also plans to buy back all water allocations along the river that have not been utilized. Australian economy has been growing at quite a fast rate since 2007. GDP in 2007 had increased by 3.8% even after a decline in farm production due to draught. The growth was attributed to high investment in business expansion of the export market. Private business investment had increased by 7.6% due to the reclassification of Telstra from public to private. Engineering industry also experience some steady growth in 2007. Business profitability also increased by 4.4%. High growth in profits was experienced in the manufacturing and retail trade. Australia is experiencing the highest level in he terms of trade since 1950. This in return has supported growth in national income with gross domestic income growing by 1.9% to around 5.4% in 2010.Exports increased by 1.4% to 4.7 % in 2009. A fall in the commodity exports was offset by an increase in other exports in the same year. Resource exports including coke and briquettes, increased by 2.4% compared with the previous year. Imports also increased by 2.2% which was a strong indication of growth in business investment. The Australian economy is experiencing the highest level of expansion since 1996. This has seen an increase in real wages by 20.8 % while the unemployment rate is now at its lowest (Spoehr, 2005). The strong investment growth is contributing in the expansion of economy’s capacity and is playing a big role in sustaining growth. The timely adjustments to terms of trade illustrate the flexibility of the Australian economy. Targets, Instruments and Goals of Macroeconomic Policy The Australian government will not intervene in the macro economy if markets are able to bring economic equilibrium that result in full employment level with stable prices and favorable economic growth. The government would intervene by use of macroeconomic policies in order to improve performance of the economy. Other targets that the Australian government aims to achieve include low inflation rate, low unemployment rate, and a favorable balance of payment. The government of Australia has set a target of achieving an inflation rate of around 3%.  Policy Instruments These are options available to a government for managing the economy. These are means by which the government achieves the economic targets. They include fiscal policy, monetary policy, and supply-side policies (Spoehr, 2005). Quite often, these instruments influence factors that are necessary for economic growth such as supply and demand. Fiscal Policy It is a macroeconomic policy that may involve changes in the level of government spending, taxation, and borrowing with an aim of increasing the level of economic activity in the market. This policy is undertaken directly by the government unlike the monetary policy which is handled by the Reserve Bank. Its aim is to influence the level of supply and demand in the market. Monetary Policy The government may intervene to bring about changes in interest rates through the Reserve Bank of Australia. The Reserve Bank of Australia has the responsibility of ensuring a stable currency in the market. This is according to the provisions in the Reserve Bank Act of 1959, section 10(2).This may result in changing the cost of borrowing money which influences the rate of return on savings and hence altering the overall demand for money and its supply. Monetary policy may also involve changes in the exchange rates where the government through central bank intervenes in the foreign exchange market in order to influence the value of country’s currency against other currencies in the market. Supply-side Policies These are microeconomic policies that are designed to boost the supply-side potential of an economy. They make markets to be more effective and hence contribute to the growth of national input. Inflation Trends in Australia In economics inflation refers to the rise in prices measured against a standardized level of purchasing power. It is measured by comparison of two sets of goods at two different points in time (Fatianni, 1997). The increase in cost that is not reflected in an increase in quality is then calculated. A number of measures can be used to calculate inflation rate depending on circumstances. The most common indicators of inflation include Consumer Price Index (CPI), which is used to measure consumer prices and GDP deflator which is used to measure inflation in the whole country. In the fourth quarter of 2010 the inflation rate in Australia was reported to be 2.7%. The average inflation rate in Australia from 1937 to 2010 was 6.02 with the highest being 17.6 in March1975. September 1997 recorded an inflation rate of -0.3 % which is the lowest in the history of Australia. The above graph shows the inflation trends in Australia. It can be noted the inflation rate was at its highest in 1975 when it had reached 18%. By then the australian governemnet had not introduced macroeconomic targets. After the introduction of targets in he mid 1993, the inflation rate dropped to na aversge of 3.5% and this is a measure of a high economic growth. Source: RBA The above graph shows the chnges in the levels of CPI from 1993 to 2009. The bar chart is used to indicate the CPI in quarterly level while the linear section shows the CPI levels at the end of the year (Peston, 1982).The graph shows a stable inflation trend in 1990s with a high inflation trend in 1995 and 1996. The CPI inflation averaged 3% from the year 2000 to 2007. Unemployment Rate in Australia In February 2011 the unemployment rate in Australia was 5%. From 1978 to 2010 the unemployment rate in Australia averaged 7.1% and was at its highest in December 1992 where a rate of 10.9% was recorded (Bell, 2000).The lowest rate of 4% was recorded in February 08. Labour force is the number of employed people plus the number of those who are unemployed but searching job. The non labour force those working in the military and those looking for work. Australia GDP Growth Rate In the fourth quarter of 2010, the Gross Domestic Product in Australia was measured at 0.7 %. The average quarterly GDP Growth was 0.88% from 1959 to 2010 with highest being 4.5 % in March 1976 (Singh, 1998). The lowest was -2.50 % in June 1974. Year GDP - real growth rate Rank Percent Change Date of Information 2003 3.60 % 79   2002 est. 2004 3.00 % 108 -16.67 % 2003 est. 2005 3.50 % 120 16.67 % 2004 est. 2006 2.70 % 153 -22.86 % 2005 est. 2007 2.70 % 166 0.00 % 2006 est. 2008 4.30 % 131 59.26 % 2007 est. 2009 2.30 % 151 -46.51 % 2008 est. 2010 1.20 % 96 -47.83 % 2009 est. Definition: This entry gives GDP growth on an annual basis adjusted for inflation and expressed as a percent. Source: CIA World Factbook In the last five years, Australia’s GDP has grown by 3.5% annually while inflation has averaged 2.5% during the same period (Kelly, 2002). Australia’s economy today is quite competitive and productive compared to the way it was in a decade ago. Productivity Growth Productivity is the pillar to economic growth. As Bell notes, a country’s ability to improve the standards of living depends on its ability to raise the output per worker (Bell, 2004).In the early 1980s and 1990s when Australia was experiencing recession the productivity rate was relatively low. In the current cycle the productivity in Australia has continued to be on the rise. Since 1980, Japan has remained the most important export market for Australia and accounts for quarter of all the Australia’s exports. Healthy Corporate and Banking Sectors Banking and corporate sectors in Australia have undergone a lot of changes. They were highly affected during the recession of 1990s. It was during the recession period that deregulation of the financial institutions was introduced. This encouraged banks to lend a lot of money leading to an economic growth as a result of increased investment. The share of corporate profits had decreased in 1970s but peaked during 1980s (Saal & Garcia, G. 1996) .Corporate borrowing reached its highest level of around 70% leading to a situation referred to as ‘bubble burst’. Challenges Facing Policy Makers in Australia The main challenges that policy makers in Australia face include unemployment rates and relatively high inflation rates that are experiences at times. A high inflation rate was experienced in 2008 and 2009 (Gordon, & Valentine, 2009). This could probably be due to the global financial crisis that was experienced in the whole world. A high inflation rate leads to a low purchasing and a decrease in the value of Australian currency. Many investors are turned away by high inflation rates as they fear the high cost of investing. The policy makers have to ensure that inflation remains at its lowest for better economic growth.Unemployment is another challenge that policy makers in Australia face. Australia provides some benefits to the unemployed population and this is a major economic effect to the government as a policy maker as it has to handle other expenditures as well. Policy makers are therefore tasked to ensure that the rates of unemployment are kept at the minimum. Economic Theories Learnt in Class It is the responsibility of the government with the help of various organizations to achieve the four macroeconomic policy objectives (Otto, 2007). They include; attaining low level of unemployment, low inflation rate, high GDP and ensuring there is positive balance of payment. The economic theories that have been covered include how fiscal and monetary policies achieve their objects and causes of inflation. There are two types of inflation; cost-push and demand –pull. The demand-pull inflation is caused by high demand that eventually causes high wage rates. Prices increase due to high demand. A healthy economy is characterized by low inflation rate and stable prices. This in turn encourages investments in the economy. A high inflation rate is controlled by introduction of monetary policy. The contraction monetary policy is used to reduce the level of the money circulating in the market by increasing interest rates in the banking sector (Garnet & Lewis, 2009). The money from the economy is driven in to the banks. Expansionary policy is used when there is low money supply in the market, and does the reverse. When there is high inflation, a contraction fiscal policy may also be used. Taxation level is increased while the government expenditure is reduced to get rid of the excess money in the economy. Expansionary policy is used when there is deflation. Government expenditure is increased while taxation levels are reduced with an aim of putting additional money into the economy. Conclusion In conclusion the macroeconomic policies in Australia are explained in terms of inflation, unemployment and GDP. Australia has been experiencing varied economic growth and inflation rates for the last ten years (Zelmar & Stone, 2000). It has experienced a stable economic growth but recorded high inflation and low GDP during the 2008 global recession that didn’t not spare Australia either. The situation currently in Australia looks positive with relatively low level of unemployment and increased GDP rate. If this trend is to persist, Australia shall experience a high economic growth in the years to come. References Garnet, A., & Lewis, P. (2009). The economy in Aulich: Howard’s Fourth Term. Sydney: New South Wales University Press. Otto, G., (2007).Central Bank Operating Procedures: How the RBA Achieves its Target for the Cash Rate”. Australian Economic Review, June, Vol. 40 Issue 2, p216-224. Gordon, C., & Valentine, T. (2009). Economics in Focus: The Global Financial Crisis. NSW: Pearson Education. Bell, S. (2004). Australia’s money mandarins: the reserve bank and the politics of money. London: Cambridge University Press. Kelly, J. 2002. Australian economy and society, 2001: education, work, and welfare. New York: Federation Press. Peston, M. (1982).Theory of macroeconomic policy. London: Pearson. Fratianni, M. (1997). Macroeconomic policy in open economies. New York: Greenwood Publishing Group. Jain, T. (2007). Principles of Macroeconomics. London: Routledge. Saal, M., % Garcia, G. (1996). Bank Soundness and macroeconomic policy. New York: IMF. Singh, A. (1998). Australia: benefiting from economic reform. New York: IMF. Zelmar, M., & Stone, M. (2000). Adopting inflation targeting: practical issues for emerging countries. London: IMF. Spoehr, J. (2005). State of South Australia: trends & issues. New Delhi: Wakefield Press. Bell, S. (2000). The unemployment crisis in Australia: which way out? London: Cambridge University Press. Drake, P. (1988). Economic growth for Australia: agenda for action. Sydney: Routledge. Mishkin, S. (2004).The Economics of Money, Banking, and Financial Markets, Boston: Addison-Wesley. Read More