Macroeconomic Policy in Australia - Case Study Example

Macroeconomic Policy in Australia (Name of the student) (University) Abstract Australian economy has been known to be one of the thriving economies in the world. Over a long time, macroeconomic policy in Australia aimed at regulating inflation and reducing chances of recession. This takes us to macroeconomics where we meet the topics in question. The topics include growth of the economy, unemployment and inflation. However, most of the countries’ macroeconomic policies are aimed at addressing economy as a whole. Unemployment and inflation attract debates in the publics and the civil society. This paper addresses two aspects of macroeconomics policies; unemployment and inflation in Australia in the last one decade along with the challenges the policy makers in Australia are facing currently in trying to solve issues on economics of the country. The second part looks at the tools and objectives that are appropriate to the policy for Australia. Lastly, we will look at the macroeconomics theories in context Economic Issues and Challenges Facing Policy Makers in Australian Currently The Experiences of Australian economy According to (Sinai, 2009), there are four major objectives of macroeconomics; full employment, stability of commodity prices, external balance and economic growth. During the last few years, Australia was not exceptional in the Global Financial Crisis. It got its share of slow economic growth, inflation and unemployment. Australian Unemployment Trend Unemployment is the opposite of employment; it simply refers to the s where individuals who are capable and willing to work at existing market rates but are not able to secure a job, (Otto, 2007) Australian Bureau of Statistics puts down that, unemployed person is that one who has attained the age of 15 years and above and is ready to work but can’t get a job and has not worked even for an hour in the last one week. It goes ahead to say that, unemployment rate is the number of unemployed persons divided by the total number of employed persons and the results multiplied by one hundred. In an attempt to explain unemployment, Australian Bureau of Statistics came up with the following graphs. The first one shows trends of unemployment since 2000 through 2010. In the firs year, that is 2000, there was a tremendous reduction of unemployment between March and September from 617,100 to 582,900. One year later, things turned upside down, in October 2001, it rose to 682,100, which fell in March, 2008 to 462,100 rising once more in mid 2009 to 662,300. The unemployment of the decade ended up at 611,000 in March, 2010. The second graph, show the rate of participation of the work force along with the rate of unemployment. The graph shows that the rate of participation was seen to have a rising tendency whereas unemployment was observed to constantly decrease till from of them from 1994 to 2009.2009 and 2010 were the only years which recorded an increase in unemployment rates. Fig 1.1 Graph of the unemployment trend (from: Australia Bureaus of Statistics) Inflation trends in Australia Inflation is the rate of annual increase of commodity prices. Prices of commodities are affected largely by the rate of inflation, (Garnett, and Lewis, 2009). In their thesis, they mention three important aspects; producer index, consumer index and GDP deflator. He also specifies that he consumer price index is the most commonly used especially in measuring inflation in a country. We can define the consumer price index (CPI) as average prices of all goods purchased for a family of four. It indicates the prices of stable products consumed by the households. The following is a linear and bar graph showing the CPI trends from 1993 to 2009. Linear graph shows the average annuals while the bar graph shows quartile CPI. The graphs show that the CPI was fairly stable in 1990s with the exception of the period between 1995 and 1996. However, from 2000 the situation deteriorated, there was a continuous fall till 2007, that means the economy was not doing very well. It rises in 2007, 2008 and 2009 before falling again in 2010 Trend of economic growth in Australian The economic growth of a country is measured by using Gross Domestic Product (GDP). GDP is actually the marginal increase in the output of a particular country annually. (Cavallari, 2008). GDP can also be measured based on individual. The graph below shows the increase in trends of GDP. There was a stable growth from the year 1995 to the year 2007 with the exception of 2000-2001, according to the graph. From there, constant decrease in GDP was recorded starting with a tremendous drop in 2008. Based on the figures from the Australian Bureau of Statistics, these have not been working well of late in the Australian economy. There is a serous drop in rates of employment, high rates of inflation and growth in GDP being at its climax in 2008 where it was at bar with the global financial crisis and economic recession. Challenges Facing Policy Makers Due to the rising rates of unemployment, changes in growth of GDP and high rates of inflation, policy makers in Australia experience challenges. Inflation Inflation rate for the years 2008 and 2009 are very high in Australia. This could be attributed to the Global Financial Crisis which prompted the world at almost the same time. The problems that arise with the rising of commodity prices are: low purchasing power for households, this reduces the wealth of the households, according to (Sinai, 2009). This also affects individuals as well as the firms, reduces savings and investment. Policy makers have to make sure this does not occur, and when it occurs, they should come up with an immediate solution to counteract the problem. Unemployment The crisis of 2008-09 also affected the employment sector. The unemployment increased over the period. This in itself is a challenge for policy makers since the government of Australia has a guiding principle of providing remuneration to those without a job. Increased unemployment will means increased number of people who should earn yet are not productive hence more expenses on government income which could otherwise be used to redeem the economic situation. To avoid such a situation, policy makers should ensure that rates are kept as low as possible, (Love & Payne, 2008). ‘Tools and Objectives’ In Macroeconomic Policy The macroeconomics strategy in Australia aims at enlarging growth, keeping inflation as low as possible and trying as much as possible to avoid foreign obligations that could possibly arise. These are well taken care of in the objectives of the macroeconomics policy. The policies entails: low inflation rates, high rates of economic growth, balance of payment and zero or minimum unemployment. To achieve the above set goals, the government of Australia will have to use some tools. ‘Goals’ in macroeconomic policy These refer to the targets which the macroeconomics policy grave to attain, (Gordon, C. and Valentine, 2009) to achieve them systematically, the government of Australia has divided them into two basic categories, the short-term goals and the long-term goals. The target include: attaining an inflation rate of less than 3%, stable growth of GDP, low level of unemployment and limiting foreign obligation. ‘Tools’ in macroeconomic policy This refers to the means that will facilitate the process of achieving the target. They are aimed at impacting on the combined supply and demand if the economic growth is to be realized along with the goal mentioned above, (Neck & Behrens, 2004). In Australia, there are two major tools that are currently used; fiscal and monetary policies. Monetary policy This is simply the act undertaken by the Reserve Bank of Australia in controlling the flow of cash in the economy. The other goals of the policy as outlined in the Reserve Bank ACT 1959, section ten, part (two) are stable currency, zero unemployment and economic progress for the good of Australians and Australia. To attain these, the policy seeks to control the supply of money and the height of interest charged. It uses the open market operations which controls supply of money and interests offered on loans and savings, (Haslag & Hein, 1992). Fiscal policy It is a macroeconomics policy tool that seeks to control government spending and taxations. Unlike the monetary policy, the fiscal policy is controlled by the government. It seeks to impact on the sum total of supply and demand to achieve the goals and objective that have been set. It depends on expansionary policy to excite the economy by increasing the amount spend by the government and at the same time reduce the taxes imposed on the citizens of the country. Alternatively, contraction policy can be used; this policy aims at slowing the actions of the economy to bar inflation. This is done by reducing the spending of the government and imposing heavy taxation on the tax payers, (Larch & Nogueira, 2009). Economic Theories Learnt In Class If the main objective of the government is to attain four major macroeconomic policy objectives, namely; low level of unemployment and inflation ¸ positive balance of payment and high economic growth, this will be achieved by using two tools that is fiscal policies and monetary policies. This are applied in the context lessons learnt in class on economic theories. They encompass the how economic imbalance comes up and explain in the end explanation of how the two tools achieve the purpose Causes of inflation Inflation is determined by either push on the cost or pull on the demand. In this paper, we will focus on inflation caused by pull on demand. Demand-pull inflation result from high aggregate demand or output level that is not able to satisfy aggregate demand. High demand excites the prices to increase hence a rise in wages too. This ends up in a generally expensive economy where previously affordable baskets can’t be affordable anymore. In a case where an economy is growing faster, inflation should be slow hence stability of commodity prices. The benefit of the households and businesses in the economy will be maximized. Monetary policy In a case where money supply is high or simply when an economy is experiencing inflation, contraction monetary policy comes handy in solving the problem. The main objective is to reduce the cash in circulation by raising the open market operation, raising the bottom lines for the bank requirements as well as raising the interest rates, (Soyoung, 2005). This will reduce money in circulation and increase the bank holdings. When money in circulation is low, extraordinary policy is convenient; it will reverse the whole process above. Fiscal policy Where inflation is high, contraction fiscal policy is appropriate. In these cases, taxes are raised for the tax payer reduction of government expenditure. This pipes the extra resources in the economy (Sullivan and Steven, 2003). Whenever deflation occurs in an economy, expansionary policy is appropriate to solve the problem. An increase in the government spending with simultaneously reduced taxes facilitates pumping of extra resources into the economy. Conclusion In this paper, I have looked macroeconomic policy in relation to inflation, economic growth and unemployment relation to the experiences of the Australian economy. For the last fifteen years it has been found out that the economy was relatively stable until 2008. The global recession hit Australian economy hence the current economy conditions where unemployment rates are high, economic growth is slow and inflation. The positive part of it is; Australia is slowly coming our to the world recession just like the other countries of the world. References Cavallari, L. (2008). Macroeconomic Interdependence with Trade and Multinational Activities. Review of International Economics, 16(3), 537-558. doi:10.1111/j.1467-9396.2008.00744.x. Friedman, Milton (1953), Essays in Positive Economics, London: University of Chicago Press. Garnett, A. and Lewis, P., ‘The Economy’, in Aulich, C. and Evans, M.(eds), The Rudd Government, ANU Epress. Gordon, C. and Valentine, T. (2009), Economics in Focus: The Global Financial Crisis, Pearson Education, NSW. Preliminary Evidence. Journal of Money, Credit & Banking, 24(4), 431-446. Retrieved from Business Source Complete database. Larch, M. and J. Nogueira Martins (2009): Fiscal Policy Making in the European Union – An Assessment of Current Practice and Challenges. Routledge. Neck, R., & Behrens, D. (2004). Macroeconomic Policies in a Monetary Union: A Dynamic Game. Central European Journal of Operations Research, 12(2), 171-186. Retrieved from Business Source Complete database. 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. Sinai, A. (2009). Macroeconomic Policy Challenges and Choices in a Time of Crises. Challenge (05775132), 52(2), 5-35. Retrieved from Business Source Complete database. Read More