The Australian Economy - Case Study Example

The Australian Economy The economic projections for Australia’s economy, forecast an extremely strong performance in the future. The economists project a growth of about 5.5% of the gross state product. However, the growth rates in various sectors will remain divergent. The factors that will affect this growth are interest rate frameworks. The reserve bank of Australia will raise interest rates in order to curb on the rising inflation on the economy. The Australian economy is supported by remarkable growth in mining, mining services, gas and oil sectors. Australia’s economic output from the rural areas is extremely impacted by the effects of drought. Australia plans to invest heavily in the iron mines and natural gas. This would be followed up by massive infrastructure in order to provide for the rising demand for utilities. The Australian economy responded incredibly well during the global financial debacle. The unemployment rate in 2008 was 2.3%, but the financial, global crisis affected employment opportunities in Australia (Rudd 2009). The unemployment rate rose to 5.7% in 2009, but strong interventions caused a significant decline to 4.4%. The economic policies in Australia are centered at lowering the unemployment rates and stabilizing inflation pressures on the economy. The Australian experience on unemployment has been a problem to the economy despite its relatively low rates. Australia’s dynamic changes in production trends have triggered job losses and subsequent increased unemployment rates (Bell 2000). There has been a relative consistency in unemployment rates at below 6%. Policy formulation in Australia is focused on maximizing the rate of economic growth. The policies are tailored to increased provision of the required services and goods. Unemployment causes detrimental impact to the economy. People who are unemployed experience a range of difficulties like health, financial and marital. Unemployment breeds social crimes, inequality in income distribution and vulnerable state of welfare for the society. These challenges may trigger physical and psychological stress to the unemployed. The economy experiences minimal output and loss of human capital due to unemployment. The graph below shows trends of unemployment in Australia. The rates of unemployment started rising in mid 2008 to late 2009 due to global financial crisis. Australian economy is defined by prudent monetary policies. However, in the past decade, the monetary policy has always been influenced by inflation rates. Inflation is the overall change in the prices of commodities. The Australian economy has consistently formulated fiscal policies aimed at maintaining the inflation rates at about 2-3 percent (Lewis et al 2010). This inflation target was meant to stabilize prices. Inflation is triggered by gaps in demand and supply and monetary growth. Inflation as various impacts on the economy; it affects investment policies and trading decisions of an economy. The Reserve bank formulated this policy in 1993 in order to achieve its responsibility to stabilize prices. The Australian economic policies are focused on minimal out-put variability while allowing a big margin of inflation. This measure cushions the effect of other variables like exchange rate from impacting on inflation. There was a significant economic growth rate rise to about 6 percent in 1994. During this period, the unemployment reduced but expenditure on wages increased significantly. Despite all these developments, the inflation rate remained stable at only 2%. According to Australian National Accounts, inflation has been rising and declining as shown below between 1995-2011. It is observed from the above statistics that the rate of inflation increased to about 4.5% in 2005-2008. Thereafter, a progressive reduction on the rate of inflation, to about 2.25% was witnessed till 2011. In 2005-2008, the financial prices rose significantly while the unemployment rate declined to low levels. These developments put pressure on the economy and thus a rise in inflation was inevitable. The Australian government faces the challenge of formulating policies that would spur economic growth, stabilize low levels of inflation and minimize foreign debts (Swan 2010). The study of economic growth reveals that the economy experiences various predictable and unpredictable changes. The fiscal policies and monetary policies should anticipate protecting the economy from these uncertain events. The global financial crisis signaled a critical need for prudent fiscal policies. The world economy was threatened by the crisis that a majority of economies had not anticipated. The challenge for policy makers is to insulate the national economy from the ever changing international business trends. The government’s economy is managed by the fiscal and monetary policies. The fiscal policy focusses on formulation of the national budget expenditure while putting into perspective the economic objectives of the nation. It comprises the taxation and government expenditure policies. The fiscal policy balances the government’s revenues and expenditure in order to spur economic activity according to the economic objectives. National budgets are extremely significant since they influence the economic growth. The economic growth further affects the budget projections. The budget is defined by the cyclical and structural features. These features can be automatic or discretionary. Cyclical features include the automatic stabilizers like government expenditure and taxation structures that are reviewed depending on the economic situation. Structural components may be necessary when intervening to change the economic undertakings. These cyclical and structural features are used to provide short-term solutions, to stabilize economic indicators like inflation. In the short-term, fiscal activities focused on economic growth are employed by the government. These fiscal measures include reduction in taxation, increase in investment and government expenditure. The fiscal instruments are also used to determine redistributive taxes and income distribution policies. Redistributive policies help in reduction of income inequalities. The fiscal policies are extremely integral to the national economic growth. The monetary policy is a preserve for the Reserve Bank of Australia (RBA). Monetary policy determines the amount of credit and value of liquidity within the economy. This policy has always focused on the impact of interest rates and internal market demands (Lewis et al 2008). The market demands include money market and transaction of government bonds. The monetary policy is either loosened or tightened in order to respond to market demands. Excess liquidity is established when RBA purchases bonds. Liquidity eases pressure on interest rates, spurs investments and consequently increases employment opportunities. On the other hand, RBA sells its bonds in order to reduce the liquidity in the market. This yields an increase in interest rates that discourage investment expenditure. This measure of constricting monetary policy is meant to curb inflation pressure on the economy. The monetary policy is enormously instrumental to the RBA’s quest to maintain inflation rates of between 2-3%. Some interventions by the RBA are called sterilized intervention. They are meant to sustain stability of the economy without altering the monetary policy. For instance, a rise in GDP stimulates increased revenue collection, which triggers a, fall in transfer payments. The Australian government has employed these policies in order to increase national fiscal surplus and limit government debt. External stability and control stimulates growth opportunities. The Australian government’s macroeconomic goals include stable economy, minimal unemployment, low inflation and balanced revenue and expenditure. The monetary policy has been of significance in determining the exchange rates. Exchange rates form another economical instrument though it is influenced by both fiscal and monetary policies. The exchange rates depend on the strength of the local currency. The stability of a currency is dependent on the effectiveness of the monetary policy put in place. Hence, monetary policy is a useful instrument to the economy. Macroeconomic theory is mainly related to the concepts of unemployment, inflation and output. Total national output refers to total national production during a given time. This is measured as gross domestic product (GDP). GDP is the worth of all finished goods produced at a given period. Economists in Australia use different techniques to measure GDP. The first method used is production method. It determines the worth of all services and goods less the expenditure incurred in production annually. The net result is the value of the gross domestic product. Another approach the gross domestic product is the expenditure method. This is the difference between exports and imports. This method also considers the cumulative expenditure of households, governments and businesses on services and goods. The third approach is the income method. This is focused on the cumulative revenue from the goods and services produced. The formulation of macroeconomic policy encompasses all the sub-units of the gross domestic product. These components are consumption ©, Investment (I), government expenditure (G) and net exports (NX). The expenditure on goods and services by households is classified under consumption. Investments include business assets and any new expenditure on household assets. Government expenditure includes expenditure by the federal, local government and state on services and goods. In order to determine the gross domestic product, the components of GDP are summed together. GDP=C+I+G+NX According to the Australian National Accounts 2010-2011, GDP was $1.32 trillion, C was $746.7 billion, I was $371.1 billion, G was $240.1 billion, and NX (exports-imports) was -$31 billion. Economic theory is used, by policy makers, to determine the aggregate demand on services and goods. The aggregate demand projects the total expenditure on total production of goods and services in a country. The economic theory provides explanations on the aggregate demand curve patterns. For instance, a downward slope on the aggregate demand curve is due to decline in expenditure, and international impact on exports and imports. An aggregate demand curve shifts to the right due to increase in demand and shifts to the left if there is a decrease in demand. Increase or decrease in demand is dependent on government expenditure, net exports, consumption and investment (Otto 2007). Economic theory on aggregate supply helps economic policy makers to analyze the total output of the economy. The aggregate supply curve is important in determining the threshold of output producers can supply at a certain price. This theory of supply is essential in government purchases. The aggregate supply curve is helpful in determining wages, output and labor. In the short run, aggregate supply curve slopes upwards since prices for commodities rise depending on the amount of wages. Businesses make high profit when wages fall. They recruit additional labor in order to increase output. When an economy has zero unemployment rates, the aggregate supply curve is vertical. The economic theory suggests that a shift in aggregate supply curve is attributed to various factors; labor supply, cost of production, new technology, increase in output, additional resources and investments. Australian economy seeks to maintain low unemployment rates by stimulating a shift of the equilibrium to the potential GDP. When the economy is in equilibrium, the aggregate demand is equal to aggregate supply. The economic theory provides insight to inflation. Inflation is a vital concept that policy makers tackle in the economy. The mandate of the reserve bank of Australia is to establish a stable inflation of about 2-3%. Inflation occurs when actual GDP is more than the potential GDP (Montiel and Agenor 2008). Inflation is stimulated by high liquidity, increased government expenditure and increased import prices. Usually inflation is triggered by increased production costs. An increase in production cost may be due to depreciation of the Australian currency and external effects like oil prices. The economic theory is extremely important in the formulation of fiscal and monetary policies. It highlights the various factors that affect the components of the economy. For instance, consumption potential of an economy is limited by income per house holds, credit facilities, population age, and interest rate. These factors are critical in analyzing and planning for economic growth of an economy. Economic theory stipulates that fiscal policy regulates government expenditure and taxation. This policy can either be automatic or unrestricted. The policy makers may use expansionary policies to increase aggregate demand. It may be applied in increasing pension schemes and direct government spending like building infrastructure. Implementation of these policies causes the aggregate demand curve to shift to the right. Economic theory identifies the fiscal factors that can cause a decline in inflation. Policies that reduce inflation are focused on reducing expenditure and aggregate demand. These policies include; increase in interest rates and reduction of government expenditure. Economic theory is enormously applicable in formulating microeconomic reforms. It is essential to succinctly have all the economic parameters regulated for the economy to grow and stabilize. List of References Australia Bureau of Statistics, 2010. Unemployment Rate in Australia. [online] Available at: [Accessed 27 April 2012]. Australia Bureau of Statistics, Dec, 2011. Australian National Accounts: National Income, Expenditure and Product [online] Available at: [Accessed 27 April 2012]. Bell, S., 2000. The Unemployment Crisis in Australia: Which Way Out? Melbourne: Cambridge University Press. Lewis, P. and Garnett, A. 2008. The Economy. In Aulich, C. and Wettenhall, R. Towards Fourth Term. Sydney: New South Wales University Press. Lewis, P., Garnett, A., Treadgold, M. and Hawtrey, K. 2010. The Australian economy: Your guide, (fifth ed). Sydney: Pearson Australia. Montiel, P. and Agenor, P. 2008. Development macroeconomics. (3rd ed). New Jersey: Princeton University Press. Otto, G. 2007. Central Bank Operating Procedures: How the RBA Achieves Its Target for the Cash Rate. Australian Economic Review, June, 40; 2, 216-224. Reserve Bank of Australia (RBA), 2010. Cash Rate Target- Interest rate decisions. [Online] Available at: [Accessed 27 April 2012]. Rudd, K. 2009. The global financial crisis, The monthly, p. 20-29. [online] February, Available at: [Accessed 27 April 2012]. Swan, W. 2010. Budget Speech, Budget 2010-2011. Common Wealth of Australia, Canberra. [online] Available at: [Accessed 27 April 2012]. Read More