Australia is one of the wealthy nations, possesses healthy economic condition and consequently becomes the 14th largest economy in this world. The exporting sector and service sector have played vital role for contributing significant portion to the country’s national income or gross domestic product (GDP). Moreover, the country has successfully reduced its poverty level (Luke 2018). With strong agricultural sector and mining sector, the country has obtained an important position in world economy. However, the economic condition of this country has experienced various obstacles for last few years. On the contrary, the United States of America has remained the largest economy across the world. As a result, the U.S dollar has considered as primary reserve currency (Frank 2018). Moreover, U.S.A has remained on the chief trading partner of Australia. Hence, this report has intended to focus on some macroeconomical indicators, like real GDP growth rate, unemployment and inflation rate of Australia. Moreover, the report has also intended to establish a relationship between net export and real exchange rate of Australia with the U.S.A. In addition to this, the specified report is going to analyse that whether the Federal Reserve Fund’s rates of the U.S.A has influenced Australia or not.
Real Gross Domestic Product ( GDP) of Australia measures the value of economic output of this country for a particular time based on a price level of particular year and consequently this measurement provides an inflation or deflation adjusted real national income of Australia (Jha 2018). This can influence the country’s inflation rate and unemployment rate accordingly. On the other side, inflation rate is another macroeconomical concept that represents the rate of increasing general price level of goods and services of Australia. This inflation rate has a negative relationship with purchasing power parity of an economy (Bermingham, Coates and O’Brien 2016). For instance, higher inflation rate implies lower purchasing power of citizens while the for lower inflation rate, the opposite situation occurs. On the other side, unemployment rate of Australia represents the share of its entire workforce, who remains unable to find jobs. According to the law of Okun, economic growth of a country has a negative relationship with its unemployment rate. This implies that if a country has 2% potential GDP growth rate then to reduce unemployment rate by 1%, the country needs to grow its GDP by 4% (Bournakis and Christopoulos 2017). Hence, with the help of statistical data and diagrams, the report can analyse relationship of real GDP growth rate of Australia with its inflation rate and also can establish a relationship between this real GDP growth rate with its unemployment rate.
Figure 1: Relation between Real GDP growth and inflation rate
The average growth rate of Australia’s real GDP from 1990 to 2016 is almost 3.08%. Initially, this growth rate has remained almost 3.53% while inflation rate of this country has remained almost 7.27%. In 1990s, the country has experienced a recession period and consequently the growth rate has decreased by 0.38%. Consequently, during this period, the inflation rate has also decreased and become 3.22%. However, after 1992, Australia has started to recover its economic condition with 0.44% growth rate. After moving at a moderate rate, this growth rate has reached at peak level with 5.01% in 1999 (McKibbin and Panton 2018). On the other side, inflation rate has fluctuated over time though it has remained at comparatively lower level. However, in 2000 and 2001, this inflation rate has exceeded Australia’s real GDP growth rate. As real GDP gives an inflation-adjusted measure of national income, it has a negative relationship with the country’s inflation rate. For instance, in 2001, Australia’s inflation rate has become 4.38% while real GDP growth rate has become 1.93% (Stevens [1] Governor, G. 2018). However, in 2009, both real GDP and inflation rate of Australia have reached at a minimum point. Hence, from this phenomenon it can be said that some macroeconomical factors except inflation rate has influenced Australia’s real GDP growth rate to decrease further. After this year, the real GDP growth rate of this specified country has increased further but cannot reach a higher rate.
Figure 2: Relation between Real GDP growth and unemployment rate
In Australia, the average unemployment rate has remained at 6.73% between 1990 and 2016. In 1990s, the real GDP growth rate of Australia has remained at a lower level while unemployment rate has remained at a higher position. However, after few years, the country has started to recover its economic growth rate and consequently the unemployment rate of this specified country has started to decline. In 2008, these two rates have become almost similar though after this year, again real GDP growth rate of this country has started to decrease while unemployment rate has increased again. The above figure has sharply showed that Australia’s economy has followed Okun’s law. This inverse relation between real GDP growth rate and unemployment rate can be discussed with help of economic concept. Within an economy, higher GDP growth rate helps the country to generate more employment opportunity and this in turn forces the unemployment rate of this country to decrease further. The opposite phenomenon occurs when the country experiences decrease in real GDP. This phenomenon has also occurred in Australia.
After analysing these two relationships, the report can state that whether the country has experienced any business cycle or not. This business cycle provides a clear understanding for a country’s economic growth (Bertay, Demirgüç-Kunt and Huizinga 2015). It is very difficult for a country to construct a smooth trend of economic growth over time. Due to fluctuation of various economical factors, this cycle fluctuates and consequently gets four phases, viz., expansion, peak, recession and trough. According to above two diagrams, Australian economy has experienced recessionary period during 1990-1991, 2000-2001 and 2008-2009 (Abs.gov.au. 2018). Hence, during these phases, the economy has experienced slower rate of economic growth, higher rate of inflation along with higher rate of unemployment. However, after 1991, Australia has experienced expansionary period of its business cycle and consequently in 1999 it has achieved highest economic growth. However, after this year, another business cycle has started and the economy has again fallen in a recessionary period while the world economy has experienced financial crisis in 2008 (Persakis and Iatridis 2016). At present, due to decrease in mining investment, and lower household spending along with lower wage growth has forced the country’s economy to experience slowdown in economic growth.
Relation between net export and real exchange rate of Australia with USA:
Net export of Australia shows the difference between its total export and total imports. Moreover, real exchange rate represents the ratio between price levels of a foreign country with domestic one (Arezki and Brueckner 2014). For calculating this ratio, the foreign currency is converted into the domestic one. Net export and real exchange rate has an important relationship. Net export of a country decreases with other one when real exchange rate between these two countries remains high (Juselius, Reshid and Tarp 2017). On the contrary, during lower rate of real exchange rate, net export of domestic country increases. This happens because higher real exchange rate implies relatively higher prices for products of domestic country compare to the prices of foreign country’s products. Hence, during higher exchange rate, it becomes difficult for domestic country to export with higher prices while imports with comparatively lower prices become easy. On the other side, lower exchange rate implies lower prices for domestic products and this in turn helps the domestic country to export more products with comparatively lower prices while imports becomes costlier for this concerned country.
This report has showed the relationship between net export and real exchange rate of Australia with the U.S.A. In this context, it is important to mention that USA has remained one of the largest trading partners of Australia as both countries trades with each other by large exchange. Hence, by subtracting total export of Australia from its total imports, net export has been measured and this can influence greatly if the real exchange rate between Australia and the U.S.A varies.
Figure 3: Real exchange rate and net export between Australia and the U.S.A
According to the data of the World Bank, AUD/US real exchange has remained 1.28 in 1990 and this represents that to get 1 unit of USD, Australia needs to pay 1.28 AUD. Hence, at this situation, imports of Australia have become costly as it has required to pay more amount of AUD for purchasing a product from the U.S.A. On the contrary, during this year, exports have become cheaper for Australia and consequently the net export of this country has increased. The value of real exchange rate between Australia and U.S.A has increased further and has remained above 1.36 on an average between 1992 and 1997 (Cole and Nightingale 2016). Moreover, in 1998 this rate has become 1.59 and has increased further (Data.worldbank.org. 2018). This trend has helped Australia to increase its net export as the value of AUD has depreciated over time. Moreover, in 2000, real exchange rate has become 1.72 and in this year, the net export of Australia has reached at its higher level. Hence, the above-mentioned relation between real exchange rate and net exports can be seen in Australia. Moreover, up to 2008, trade balance of Australia has remained positive. However, after 2008, global financial crisis has affected this net export of this country. After this crisis, the value of real exchange rate between these two countries has decreased and as a result, net exports between these two countries have also decreased. This in turn has led the Australia to experience trade deficit. However, after 2012, real exchange rate has again started to increase and consequently Australia’s net export has become positive after 2014 (Reserve Bank of Australia. 2018). This again has helped Australia to achieve positive trade balance.
Cash of Australia represents the bank rate of this country. The Reserve Bank of Australia (RBA) charges this official interest rate from commercial banks to get overnight loans. This cash rate helps RBA to adjust interest rate of this country. In this context, it can be mentioned that financial institutions cannot change this rate by doing any transaction (Makin, Robson and Ratnasiri 2017). The Federal Reserve’s fund rate of the U.S.A represents the interest rate. At this rate, banks and other credit unions transfer their reserve balances to other financial institutions for depositing overnight money (Chen, Filardo He and Zhu 2016). Moreover, the Federal Fund’s rates play a significant role for taking any financial decision of the U.S.A within its financial market.
Figure 4: Cash rate of Australia and Federal fund rate of the U.S.A
The Fed rate has remained 7.31% in 1990 while Australia’s cash rate has remained 13%. However, the Fed has decreased its interest rate after this year and consequently the RBA has also decreased its cash rate. However, in 1995, cash rate decreased significantly though after that the central bank has recovered its interest rate. On the other side, the Federal Fund rate of the U.S.A has fluctuated significantly between 2000 and 2008. During this period, the Fed has increased and decreased its interest rate between 7.5% and 0.5%. Moreover, due to financial crisis, the Fed has decided to keep its interest rate at 0.5% (Liu, Margaritis and Qiao 2016). According to above diagram, the Fed has influenced the cash rate of Australia to some extent. This is because the U.S.A has a strong market position in world economy for which, economic outcome of the U.S.A can influence directly or indirectly other countries across the world.
After discussion some important macroeconomical factors, economic outlook of Australia can be measured. It is considered that Australia is going to experience a healthy economy in future and this in turn can help the country to experience expansionary period to the country’s business cycle.
Conclusion:
According to above discussion, inflation rate has negatively influenced real GDP growth rate of Australia. Moreover, real GDP growth rate and unemployment rate has sown an negative relation and has supported Okun’s law. On the other side real exchange rate and net export between Australia and the U.S.A has faced a negative relation and cash rate has followed the Fed rate.
References:
Abs.gov.au. 2018. 6105.0 – Australian Labour Market Statistics, Jan 2006. [online] Available at: https://www.abs.gov.au/ausstats/[email protected]/featurearticlesbytitle/09CA2BE34A12A670CA2570EE00193A49?OpenDocument [Accessed 21 May 2018].
Arezki, R. and Brueckner, M., 2014. Effects of international food price shocks on political institutions in low-income countries: evidence from an international food net-export price index. World Development, 61, pp.142-153.
Bermingham, C., Coates, D. and O’Brien, D., 2016. Estimating Commodity Substitution Bias in the Irish Inflation Rate Statistics during the Financial Crisis. The Economic and Social Review, 47(3, Autumn), pp.327-337.
Bertay, A.C., Demirgüç-Kunt, A. and Huizinga, H., 2015. Bank ownership and credit over the business cycle: Is lending by state banks less procyclical?. Journal of Banking & Finance, 50, pp.326-339.
Bournakis, I. and Christopoulos, D.K., 2017. Output and Unemployment: Estimating Okun’s Law for Greece. In Political Economy Perspectives on the Greek Crisis (pp. 273-287). Palgrave Macmillan, Cham.
Chen, Q., Filardo, A., He, D. and Zhu, F., 2016. Financial crisis, US unconventional monetary policy and international spillovers. Journal of International Money and Finance, 67, pp.62-81.
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Juselius, K., Reshid, A. and Tarp, F., 2017. The real exchange rate, foreign aid and macroeconomic transmission mechanisms in Tanzania and Ghana. The Journal of Development Studies, 53(7), pp.1075-1103.
Liu, M.H., Margaritis, D. and Qiao, Z., 2016. The Global Financial Crisis and Retail Interest Rate Pass-Through in Australia. Review of Pacific Basin Financial Markets and Policies, 19(04), p.1650026.
Luke, A., 2018. Critical literacy in Australia: A matter of context and standpoint. In Critical Literacy, Schooling, and Social Justice (pp. 168-188). Routledge.
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