Evaluation of Macroeconomic Performance Australia †Free Sample

Question: Discuss about the Evaluation of Macroeconomic Performance Australia. Answer: Introduction According to the article posted in The Economic Times Macroeconomics is the branch of economics that studies the behaviour and performance of an economy as a whole. It focuses on the aggregate changes in the economy such as unemployment, growth rates, gross domestic product, and inflation. From the given statement one can easily understand that macroeconomics acts as the method to analyse all of the gross indicators as well as the microeconomic components that affect the economy. In the contemporary economy, Macroeconomics models have become an indispensable tool for Government as well as corporations in the formulation of economic policies, strategies and decision making. Today, Australia is one of the richest Asia-Pacific nations and has enjoyed more than two decades of economic augmentation. Australia is one of the country which is internationally advanced and forward country regarding its services, technologies, and high value-added manufactured goods. According to the Australian Economy, the economic growth of Australia has grown 2.4% till the evaluation done on 7th May 2017. All the information are clear from the pictures above. Overall, Macroeconomics consist of list of piece of economic data of macro scale which are used by analysts to interpret and finalize present or future the overall health of the economy. The economic indicators include Gross Domestic Product(GDP), Inflation rate, Unemployment rate, Exchange rate, Interest rate, Balance of trades, Fiscal and Monetary policy, and the Consumer Price Index (CPI). The Key Macroeconomic Indicators Gross Domestic Growth Rates (GDP) The measure of aggregate output in the national income accounts in national income is gross domestic product. The calculation of GDP in Australia is made by Australian Bureau of Statistics which makes two types of revisions one quarterly and other one annually. There are two types of GDP namely nominal GDP and real GDP. Nominal GDP sum of the quantities of final goods produced times their current price whereas real GDP is constructed as the sum of the quantities of the final goods time constant prices. Source: (Trading Economics, 2017). The above picture shows the evolution of annual GDP of Australias economy from January 2014 where we can find that the growth rate is higher in 2016 but them GDP of Australia has not changed its status from recession interrupted by short recessions over few years. The figure shows the series of expansions that Australian economy has gone through. The average growth rate from January 2014 to January 2017 is 2.7. As we know that GDP is an important number which reflects the economic size of the country. Australia has a good economic condition till date followed by the good GDP growth rate. Inflation Rate The inflation rate is known as the rate at which the price level increases. Inflation affects economy both positive and negative ways. If inflation increase the increase opportunity cost which may lead to discouragement in investment and savings. Positive effect is that it central banks get chance to adjust interest rate to stabilize the economy and reducing unemployment due to nominal wage rigidity. Source: (RBA, 2017). The inflation rate of Australia is decreasing comparing to past few years till date .According to the recent reviews from researchers of the UBS economics team Australias inflation to the US, Canada, and Europe it is typically 1 percent faster in almost every sector on an annualized basis. This statement proves that Australia has less competitive market structures in comparison to other developed countries such as America, Canada, and Europe over the best part of few years. Unemployment Rates Unemployment rate can be defined as the ratio of the number of unemployed people to the total number of people in labour force. The unemployment rates is directly proportional to the number of people who are unemployed, larger the unemployed peoples number larger the unemployment rate. Source: (ABS, 2017). The above figure reflects that the unemployment rate in 2016 has reached to 6 per cent whereas previous year it was 5.5 percent. The reason behind the increase in unemployment rate maybe the high number of human resource but less job opportunity available. Unemployment rate indicates whether an economy is operating above or below its normal level of activity. Unemployment has important social consequences. Lower unemployment rates is also a problem as it shows that the economy not using some of its human resource efficiently. Foreign Exchange Rates Exchange rate is regarded as the value of one countrys currency in relation to another countrys currency. In foreign exchange rates, the price of unit of domestic currency is expressed in terms of the foreign currency. Foreign currency rate has base currency, in the case of Australia and many other countries they use US dollars as their base currency. The exchange rate fluctuation have compositional effects, causing some industries to expand whereas some to shrink. The depreciation in Australian dollar encourages the utilization of domestic goods as imported goods becomes expensive. A lower exchange rates also makes Australian exports more competitive as exported goods and services become cheaper in foreign currency terms. From the graphs above we can find that the exchange rate of Australia is different from year to year but in past few years, it has been low. As per the last record made 0.7 was the exchange rate of Australia. Interest Rate An interest rate is the cost of borrowing money. The variation in interest rate affects many industries, but the real estate and banking are the most affected area among them. When the interest rate rises loan taking becomes more expensive, loan products gets affected whereas negative impact in residential real estate prices occurs. The low-interest rate is the symptoms for falling inflation. The interest rates in Australia is decreasing in best few years which leads to cheaper borrowing, encourage spending and investment, due to this, there will be high aggregate demand and economic growth which is good from the economic prospects of the country. If interest rate declines than it will also depreciate the exchange rates. Balance of Trade (BOT) BOT is a statistical tool that aids in understanding the relative strength of a countrys economy comparing to other countries economy and the flow of trade between nations. In another word, it can also be defined as the difference between countrys imports and its exports for the given period of time. A country which imports more of its goods and services than its export than it has trade deficit. Alternatively, if the country exports more goods and services than the goods and services they imports, it has a trade surplus. By subtracting the credit items such as exports, foreign investments in domestic economy to import items such as imports, foreign aid, domestic investment abroad we will know either it is trade deficit or trade surplus for a given country in given period of time. Source: (Trading Economics, 2017). The graphs above clearly shows that the trade surplus of Australia has 0.55 billion from the previous years as the export rose less than imports in 2017. In February 2017 Australias trade surplus jumped to the second highest level on the record. Consumer Price Index (CPI) Primarily, CPI is a statistical estimate that analyses the prices of a basic commodities within a nation. Mainly, it is obtained by calculating changes in the price of selected commodities. Thus, any changes in the CPI reflects changes in prices in the economy associated with the cost of living. It is worth pointing out that the level of CPI in Australia has been rising substantially over the past few years. In the first quarter of this year, the CPI increased to 110.50 index points, compared to the 110 index points recorded in the fourth quarter of last year (Australian Government, 2017). Since 1950 until now, the average level of CPI is estimated at 43.20 index points. During this period, the highest CPI level is the 110.50 index points experienced in the first quarter of this year (Trading Economics, 2017). Contrariwise, the lowest CPI was attained in 1950 at 4.20 index points (ABS, 2017). Fiscal and Monetary Policy Fiscal policy in Australia In economics, fiscal policy pertains to the use of government revenue collection in form taxes and government spending in the form of public expenditures to influence the aggregate economy. Predominantly, fiscal policy in Australia is undertaken by the Australian government, through the congress. Keynesian economics suggest that changes in the level of spending and taxation results in changes in the aggregate demand of the economy as well as stimulates economic activity in the aggregate economy. Fundamentally, the development and implementation of fiscal policy in the country is compliant to the Charter of Budget Honesty Act 1998 (RBA, 2017). Notably, this act imposes a formal obligation on the state to formulate and report its medium-term fiscal strategies. It is imperative to note that the Australian government uses expansionary fiscal policy to stimulate the economy during times of reduced growth. On the other hand, it uses contractionary policies to slow the level of economic growth if the economy is experiencing excess growth. Imperatively, induced changes in the composition and degree of government spending and taxation in Australia affects various macroeconomic variables, among them the aggregate demand, savings, investments and the degree of income distribution. Normally, when the government believes that there is not enough business activity and spending in the economy, it induces a stimulus spending by increasing the amount it spends. In the same way, if the tax receipts from the public are low, the government issues debt securities in the form of government bonds and treasury bills. Alternatively, instead of issuing government bonds and accumulating debt, the government also increases the level of taxes in the country. By doin g so, the Australian government is able to pull money out of the economy and raise its revenue. According to Carmignani (2013), the Australian economy exhibits a counter-cyclical stance in its fiscal policy. He suggests that this countercyclical stance of the Australian fiscal policy has been beneficial for the achievement of macroeconomic objectives such as the stabilization of the economy and long term growth. As such, there is a direct link between the countrys fiscal policy and cyclical stability. For this reason, it is noteworthy that the fiscal policy conducted by the Australian government plays a significant role in influencing the level of economic activity to influence growth and stability in the economy. Monetary policy in Australia According to the Reserve Bank of Australia, monetary policy refers to the actions of the countrys central bank that aim at achieving macroeconomic policy objectives within the economy. Predominantly, monetary policy in the country is exclusively conducted by the Reserve Bank of Australia (RBA). Today, the monetary policy decisions in the country are executed through changes in the cash rate. Mainly, this involves alterations in the level of interest rate on loans (RBA, 2017). Consequently, this rate affects other interest rates in the country, thereby influencing the general behavior of lenders and borrowers and inflation rates. For this reason, changes in the countrys monetary policy means alterations in the target for the cash rate, which causes an alteration in the interest rate system that prevails in the entire economic system. In determining and setting the countrys monetary policy, the RBA has an obligation to preserve full employment, price stability, as well as facilitate economic welfare for the people of Australia. Thus, in order to realize these objectives, the monetary authority sets an inflation target that aims at preserving the level of inflation in the nation at around 2-3 percent, over the short and medium term (RBA, 2017). Essentially, this inflation rate is appropriately low that it does not lead to the distortions in the economy. Typically, controlling the level of inflation preserves the value of the countrys currency and inspires robust and sustainable growth within the country over the long run period. In addition to this, the monetary authority utilizes instruments such as open market operations (OMO), selective credit, moral suasion and reserve requirements to influence the aggregate economy. Primarily, it uses the OMO to keep the cash rate as closer to the goal set by the Board. Mainly, this is achieved through the management of supply of funds available to the bank in money market (Dolamore, n.d.). Basically, to raise the level of money supply, the RBA purchases government securities from commercial banks, thereby achieving expansionary results in the economy. In contrast, in order to achieve contractionary measures, the central bank sells government securities to commercial banks and mops up excess money supply from the economy. Subsequently, this helps in managing the degree of interest rates and inflation in Australia by controlling the supply of money that is available for banks in the financial market. Results and Recommendations Generally, the Australian economy has been performing well. The economy has strived to maintain robust economic growth levels while maintaining relatively low inflation rates. However, the level of unemployment in the country remains high. Long term unemployment and youth unemployment has become a constant economic problem in Australia. For this reason, the government should step up and initiate mechanisms that will help increase the level of employment in the economy. Firstly, the government may use expansionary monetary policies to reduce the interest rates in the country through the RBA. Characteristically, a decrease in interest rate level in the economy will result in an increase in investment activity, which in turn will stimulate the aggregate demand. Consequently, an increase in aggregate demand will increase the demand for labor to meet the new demand. As a result, the rate of employment in the economy will rise. In addition, the government should try to reduce the level of Consumer Price Index in the country by maintaining price stability. By and large, a continued rise in the CPI level in the country can be attributed to the ever increasing price level caused by inflationary pressures in the economy. Thus, the government, in collaboration with the countrys central bank should maintain the money supply at optimal levels through selective credit, higher reserve requirements, among others. By and large, this would ensure price stability in the country, thereby reducing the CPI. Conclusion All in all, all factors considered, the Australian economy has been experiencing a relatively favourable economic environment. It should be noted that the economy has exhibited sustained economic growth over the past few years. Even so, there have been instances of unstainable unemployment, CPI levels, and inflation rate. Currently, the economy has great prospects for economic growth and development and is expected to experience expansions over the medium term period. References About Monetary Policy. 2017. [Online] Reserve Bank of Australia. Available at https://www.rba.gov.au/monetary-policy/about.html [Accessed 20 May 2017] Australia - Current account balance (2017). [Online] Trading Economics. 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