Macroeconomic Policy - Inflation, Unemployment, and Growth - Essay Example

Macroeconomic policy- Inflation, unemployment and growth Name: Institution’s name: Date: Introduction Over the past decade, Australian economy has experienced significant changes in its economy. They have moved from a dependent economy to a more independent one. Currently, overreliance on its independency has obscured the overall continuity and this characterizes the Australian economy as a whole in the European nations. Australia is considered primarily an exporter of its domestic produce and heavy borrower of commodities it is not producing in its territory. The country’s economy has always been fostered by the external elements support. Before globalization hit the economy, Australia primarily depended on the developed countries; like today’s developing countries overreliance on developed countries to boost their economies. This dependency enhanced its prone to the economic crisis as there was periodic inability for the country to earn surpluses in its export to offset the capital inflows. Such external forces experienced by the economy had an upper hand in shaping the whole economy of Australia. In most of the twentieth Century, Australians have been living in an economy characterized by high-income earners embodied by service sectors, protectionism system which is well entrenched and atypical domestic forces. Current Australian economy The economy, over the past decade, has demonstrated a high marginal propensity to consume, strong preference to leisure, and citizens prefer suburban and owner occupation in regard to being involved in leasing of the premises. The country’s Gross Domestic Product (GDP) has nourished over the past year despite the significant inconsistency as indicated below; Figure 1: Australian GDP The information above illustrates that the country has entered into a lengthened growth in its GDP. The downward fall of GDP in the year 2008 was facilitated by the global economic crisis that was experienced world wide. This trend could even surpass that of 1950s golden age when Australia economy “rode on the sheep’s back” in agriculture, specifically wool, which was imminent for Australia’s Marginal Propensity to Save (MPS) and Marginal Propensity to Consume (MPC) (Anh T. Le, 2000). The achievement in its GDP improvement for the past 10 years was due to the dismantling of the many adverse tariffs that had an impact on the Australian industries as they were not able to engage in foreign competition, deregulation of the country’s financial system which enhanced privatization of major incentives like communications, transport and utilities. As indicated above, the annual GDP for 2010 was an improvement compared to the previous year. This growth of 2.7% was instigated by the 0.8% contribution towards inventory changes, 0.4% form consumption expenditure and a mere 0.3% attributed to the fixed capital expenditure based on equipment and machinery. Specifically, the industries which enhanced this growth rate was scientific, technical services and professional industry which cited 0.3% contribution rate followed by insurance and finance posing a contribution rate of 0.2% to the Australian GDP. The reported significant decline in the GDP of the country was due to the Queensland flood that was experienced ion December 2010. The challenged will be focused on the imperative measures that the government will undertake in order to reduce the overall calamity that the country is likely to face. As such, from the above information Australian GDP decreased due to the peculiar catastrophe experienced; flooding. In the case of inflation, the past ten years has experienced inconsistency in reporting of the inflation rates. In the early 2008, inflation was impactful in the economy and Australian economy was adversely affected. Scholars have attributed its adversity to non-extensive use of mitigating tools in an attempt to minimize its effects in the overall economy. Currently the inflation rate of Australia, as per the figures reported in 2010, was 3.3% which was a reduction from the previous year’s inflation rate of 3.7%. Historically, Australian economy has experienced an average of 6.02% inflation rate over the past decade and this has necessitated peculiar interventions to be made to combat it. Generally, inflation is the change in consumer prices measured on the basis of the consumer’s purchasing power. The Inflation Rate Chart for Australian economy is given below; Figure 2: Australian Inflation rate Contrary to this, the unemployment rate in the economy has been perverse. According to the data collected by ABS, Australia is among the countries experiencing low unemployment rate. The data shows that industrialized nations have been enjoying a decreased unemployment rate for the past decade. For instance, the unemployment rate rose slightly in the year 2001 to 6.0%; according to the Australia’s treasurer speech. A consistent inflation performance allows business to confidently predict where their investments are best placed, or what results they can expect of their business strategies (Chapman, 1999). Generally, Australia’s economic growth is all the more remarkable given that Australia is still following the export formula that worked so well a century ago: close to two-thirds of Australia's exports are still rural and mineral commodities. This is considered a risky strategy. Export revenue has been realized majorly in services like insurance, banking, education and tourism. Earlier on, in 1901, the world relied heavily on what Australia produced then but nowadays, due to change in global economy, the societies have acquired wealth. Currently, the proportion that individual spends on commodities like food stuffs are minimal and most of their tastes are focused on services like overseas travel. The low unemployment rate depicted by the graphical representation above shows that the resources available are utilized and efficiently used thus increasing the society’s maximization of Government expenditure and savings. In the long run, people will enjoy high standards of living as there will be an increase in the overall government revenues. Therefore, the Australian government needs to focus on the strategies to be undertaken in order to minimize the effect of this macroeconomic aggregates. The inflation rate needs to be curtailed and this will be achieved by the policy makers designing the strategy in which the overall prices for the commodities will not exceed the accepted amount. “Instruments and targets” in macroeconomic policy Macroeconomic policies are policies implied by the market forces and government policies. The attempt is to ensure that economic equilibrium is attained without any adverse consequential problems. Macroeconomic policy involves fiscal policy and monetary policy. Monetary policy involves the use of economic instruments in managing the short-term rates applicable in a particular time period (e.g. discount rates). In the case of Australian government, monetary policy application has been rampart with the main objective being to reinstate the economic condition of the country, achieve economic prosperity and ensure full employment is attained (Chapman, 1999). Recently, the economy attained stability in its currency, thanks to the monetary policies incorporated. The Australian government, through the Reserve Bank (RBA), has a policy of controlling inflation and monetary supply through the use of interest rates. The guidelines under which the RBA operates have been set to ensure that monetary policy controls the direction of the economy. This is achieved by adjusting the flow of available money by manipulating the interest rate levers to make money more or less attractive or affordable. If inflation is trending upwards, lever is pulled, interest rates rise, and in the medium term, inflation comes down. Alternatively, the interest rate lever is released in the event of low inflation, which is generally accompanied by low investment. The graph shows how the Australian monetary policies have been beneficial in ensuring that inflation rate is mitigated. In contrary, the strategies in which monetary polices aims at affecting the economy are considered mechanical in regard to their operability. However, the aggregate association linking interest rates changes, growth in demand and inflation has not yet been clearly defined (as shown in the figure below). In the year 1981/82 there was massive increase in the rate of interest as it was designed to curtail the inflationary booms, which it later worked and contractions in consumer demand was experienced leading to reduced inflation. In responding to adverse inflationary pressures and cyclical developments experienced in the Australian economy, monetary policies have played a major role as it influences the overall inflation and aggregate demand (Marin, 2000). Fiscal policy implies that for the economy to attain equilibrium, it should be freely left without any disturbances in order to automatically adjust itself. In case where the market forces operating freely, without government intervention, provides the country with full employment, economic growth, and price stability, then government intervention would be of no importance in achieving macroeconomic goals (Bell, 2000). Ideally, in the current economy, government intervention is no less needed in an attempt to influence the economic objectives. This is done by varying the amount spent and the receipts of the country. This will enable the economic activity to alter either by fiscal deficit, balanced budget or fiscal surplus. The budget the government undertakes influences the economic performances. Policy makers in Australia focus entirely on development of sound fiscal framework which will anchor the policy decisions. The stabilizers established has enhanced the moderation of cyclical swings that is perverse in the economy. However, in the recent economic activity in Australia resurgence in the discretionary fiscal policy usage has interested the financiers and the automatic stabilizers in the economy. This shows that the Australian government has started to rely on the importance of the medium-term fiscal policies and strategies, new institutional organizations and the complete change in the macroeconomic environment. The major fiscal policies that policy makers (that is, the government) uses in coming up with economic strategy for the country include; taxation, government spending, subsidies among others. Current macroeconomic policies Australian economy has fostered to achieve the macroeconomic objective of full employment, price stabilization, achieving high living standards, economic growth and external balance. In order to achieve these objectives, Australia is undertaking a remorseful strategizing of its policy implementations. The government aims at ensuring its price of commodities are stable and are not affected by the volatility in the market (Australia. Economic Planning Advisory Council, 1999). However in comparison with the US dollar, Australian dollar (AUD) falls short of the requirement for stability. For instance, when the American crisis erupted, the exchange rate fell so that at its low it had fallen by a very significant amount. Australian economy did not resort to increase in the interest rates in an attempt to mitigate the exchange rate shift like most of its neighboring countries. The performance of the Australian dollar has not been given much interest as that of the US dollar but its currency is strengthening on a daily basis. Despite the fact that US dollar outshines Australian dollar, the past records shows that the AUD has performed well than US dollar in the recent decade. The economy of the Australia has nourished in comparison to that of the US but this does not imply that Australia is well off than US as the size of Australia’s economy is small. Australia’s official interest rate is 4.75 per cent, whereas in the US it is 1 per cent. That is a 3.25 per cent interest rate difference, which creates demand for the Australian dollar. The demand for the Australia dollar was not necessitated by the decrease or cut of the interest rates by the Australian Reserve Bank but merely the economic forces of demand. In most cases, the high return yield from Australia’s fixed Income securities attracts most of the investors making them to prefer Australia’s securities in regard to US counterpart. In addition, Australia economy offers political and economic stability, which in turn offers supports to the stability of the Australian dollar (Barro, 2000). In the case of economic growth, Australia has embodied stratified economic policies that enhance its growth in the short run. By mid 2000 the Australian economy had recorded 9 years of continual growth, averaging around 4% per year, but it tends to slow down, by 2003, Economic Growth has slowed to 2.9%. However, the Australian economy is perceived to be ahead of most industrialized countries. These causes of Australia’s Economic Growth trend can be illustrated the Aggregate Demand (AD). AD is usually derived from the Government expenditure and the overall savings that are usually used or spent in the economy. AD = Consumption (C) +Investment (I) + Government Spending (G) + Export (X) - Import (M). Therefore, the AD change is brought about by the change experienced by these components. Recently, the consumption level in the economy had increased due to the increased population. The increased population enhances individuals to save for they are uncertain about the future trend of the economy. As the investments increases, individuals tend to invest in manufacturing industries like agriculture sector. This enables them to have surplus of the commodity and making them to export to other countries, in the process increasing the country’s value of exports. The increase in these factors offsets the export made to other countries therefore increasing the overall Aggregate Demand in the economy. As Aggregate Demand is a factor of Economic Growth it therefore implies that an increase in the AD will increase Economic Growth by the same proportion. High living standards and full employment will be attained when the unemployment rate is low. The sustained low Unemployment Rate (UR) is contributed by the sustained Economic Growth of the economy. Macroeconomic reform and structural change alters the pattern of the demand and production within a society, which results numerous job losses and de-skilling. For instance, in Australia during late 1980 and early 1990, there were a lot of job losses in manufactory sector. The falling in the level of Investment will result in increasing unemployment level. This was seen during the downsizing of Telstra and Qantas, which increased the size of unemployment. References Anh T. Le, P. W. (2000). Australia's unemployment problem. Perth: University of Western Australia, Department of Economics. Aus trade (September, 2003) News: Exporters can survive higher dollar. Available: http://www.ferret.com.au/articles/3d/0c01803d.asp Australia. Economic Planning Advisory Council. (1999). Improving Australia's inflation performance. Canberra: AGPS. Barro, R. J. (2000). Macroeconomic policy. Massachussetts: Harvard University Press. Bell, S. (2000). The unemployment crisis in Australia: which way out? London: Cambridge University Press. Carol S. Carson, C. E. (2002). Statistical implications of inflation targeting: getting the right numbers and getting the numbers right. New York: International Monetary Fund. Chapman, B. J. (1999). Australian economic growth: essays in honour of Fred H. Gruen. Canberra: Macmillan Company of Australia. Howard, R. J. (1992). Inflation in Australia: the problem, its causes, policy responses. Melbourne: VCTA. Howard, R. J. (1992). 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