Typically, aggregate expenditure is a measure of a country’s national income. Profoundly, it represents the current value of all the finished goods and services in the economy. Mainly, it comprises of the sum total of all the expenditures incurred within the economy by all agents over a given period of time. For this reason, it pertains to the expenditures incurred on planned investments, consumer goods, and the total level of government spending. Hence, the components aggregate expenditure include consumption expenditure which is made up of autonomous expenditure and induced expenditure. It is also made up of the investments, both planned and unplanned. The other component is the government expenditure which comprises of expenditures on infrastructure. There is also net exports and income (Y). In this regard, the aggregate expenditure curve is a graphical representation of the aggregate expenditure of a country.
According to the article, the Snowy Hydro expansion project will have the economic and political benefit of creating many job opportunities for individuals in the engineering and construction sectors. Predominantly, one can attribute this view to the fact the project is an increase in the level of government expenditure in the economy. More precisely, this is because it is a planned capital expenditure. In the aggregate expenditure model, an increase in government spending through infrastructure projects is injection into the economy. For this reason, it leads to an upsurge in the income of Australia.
Thus, by investing in the expansion of the Snowy Hydro project, the government would be raising the level of spending in the economy, which would then lead to a growth in the national income. An increase in national income translates to a rise in the demand for workers to work in the hydro plant. Consequently, this results in an increase in the employment rate in the country. Thus, the implementation of the snowy hydro project would result in an increase in the number of job opportunities in the Australian economy.
The expenditure multiplier refers to the measure of the variation in aggregate production that arises due to alterations in the autonomous expenditure. These autonomous expenditures include investment, government purchases, and consumption expenditures. Typically, the simple expenditure multiplier comprises of only the induced consumption. Here, other forms of expenditures are presumed to be independent. However, complex expenditure multipliers inculcate the effects of other induced expenditures. The formula for a simple expenditure multiplier is denoted as:
m = 1 = 1
(1- MPC) (MPS)
Where MPC – marginal propensity to consume
MPS – marginal propensity to save
Thus, if for example, the MPC is 0.65, then the MPS will be 0.35. Thus, the expenditure multiplier would be (1/0.35) that is 2.9. Essentially, this implies that a change in the autonomous government consumption by one million would result in an increase in the level of aggregate production in the country by 2.9 million.
The formula for the complex expenditure multiplier can be denoted as follows:
m [all] = 1
{1 – [MPC + MPI + MPG – (MPC x MPT) – MPM]}
Where
MPC – marginal propensity to consume
MPI- marginal propensity to invest
MPG- marginal propensity for government purchase
MPT- marginal propensity to tax
MPM- marginal propensity to import.
Notably, this expenditure multiplier can be used to find the variation in aggregate production in the economy following variations in the level of autonomous expenditures including investments, government purchases, consumption and net exports. Unlike the simple multiplier, this multiplier includes all induced expenditures. In is noteworthy that there are various factors that influence the size of the expenditure multiplier. Predominantly, elements that influence the size of the government expenditure multiplier include the debt level, the size of automatic stabilizers, public expenditure management, and revenue administration.
The debt level. The debt level of the country has a significant effect on the size of the government expenditure multiplier. More specifically, countries with high debts have a lower multiplier. On the other hand, economies with low debts have a higher government expenditure multipliers.
The exchange rate regime. Nations that have a flexible exchange rate regime are more likely to have smaller government expenditure multipliers. Predominantly, this is because movements and fluctuations in the exchange rates can easily counterbalance the effect of flexible fiscal policy in the country. Contrariwise, nations with fixed exchange rate system are inclined to have higher government multipliers.
Sometimes, the aggregate expenditure multiplier may be large. Often, this is as a result of various conditions within the economy. Largely, large multipliers may arise when the level of inefficiency is sufficiently large, thus raising the ratio of spending. In addition, the multiplier may be large when there are significant rigidities in the labor market. As such, rigidity implies reduced wage flexibilities which tend to amplify the response of output and demand to shocks within the economy. Furthermore, the lack of automatic stabilizers in the economy tends to result in large multipliers.
According to the article, the Prime Minister and the Treasurer support the proposed company tax cuts because they believe that a reduction in the level of tax paid by companies would bring about an increase in the wage rates of workers in Australia (Henderson, 2017). According to the Prime Minister, company tax is overwhelmingly a tax on the employees, and therefore reducing the level of corporate taxes in the country would result in an increase in the salaries payable to workers (Henderson, 2017).
In addition, the article clarifies that the notion behind the tax reduction is that firms will be inspired to create more employment opportunities as well as other economic benefits to the economy because they are receiving a tax break from the government (Henderson, 2017). Notably, this is in line with economic theory which suggests that a tax cut would stimulate business activity in the aggregate economy (Henderson, 2017).
Furthermore, proponents of the tax cut argue that reducing the tax rate in Australia will help in deterring companies from shifting their returns and profits to other countries with lower tax rates. Thus, the tax cut is meant to encourage companies within the country to retain their profits within the country instead of repatriating them to economies with lower tax rates. Besides, many countries have been reducing their corporate tax rates over the years, and the Australian government finds it best to also reduce its tax rate from 30 percent to 25 percent in order to enhance the country’s competitiveness with respect to other nations (Henderson, 2017). For this reason, they believe that a company tax cut in the country is justified.
It is important to note that Australia has one of the highest company tax rates among the OECD economies. The current corporate tax rate in Australia is 30 percent. As of now, the country’s corporate tax rate is only lower than that of Belgium (33 percent), France (34 percent), and the United States (35) percent. However, the corporate tax rate in the country is significantly higher than that of Austria (25 percent), Canada (15 percent), Chile (25 percent), Czech Republic (19 percent), and Finland (20 percent). Additionally, it is greater than that of Germany (15.83 percent), Greece (29 percent), Hungary (9 percent), and Iceland (20 percent). Currently, the corporate tax rate of Australia is equal to that of Mexico only.
From the data above, one can note that the Tax rate in Australia is among the highest corporate tax rates among the OECD economies. It has the fourth highest rate of corporate tax among the OECD nations after the United States, France and Belgium. On the other hand, the countries tax level is only equal to that of the Mexican economy. Otherwise, the rest of the OECD economies have a lower corporate tax rate than Australia’s. For this reason, it is rational that the Prime Minister is advocating for a reduction in the rate of tax payable by corporations in the Australian economy.
With respect to economic theory, the reduction in the level of the corporate tax rate is expected to create a positive effect in the economy by boosting the returns to firms and investors. As such, firms will be able to retain a larger proportion of their profits. For this reason, they will be enticed to increase their production in order to further increase their profitability (Daley and Coates, 2016). In turn, this would lead to an increase in their demand for workers to produce more services and goods (Potter, 2016). An upsurge in the level of employment opportunities in the country would mean that more individuals within the Australian economy will earn a decent income.
In turn, an increase in the number of people earning an income in the country would result in a rise in the demand for consumer services and goods (Worstall, 2015). An increase in the demand for consumer goods would, therefore, result in an increase in the country’s aggregate demand. An intensification in aggregate demand, therefore, translates to an upturn in the real GDP of the Australian economy (Conifer, 2016). In this regard, an introduction in a significant reduction in the level of the corporate tax rate will have a positive effect on the level of employment and the real GDP of the nation.
From the cost curves above, a reduction in the corporate tax rate in Australia would bring about a shift in the average cost curves of firms from AC1 to AC2. The initial company profits are denoted by the rectangle abcd. However, the reduction in the cost of production due to a reduction in tax will raise the profits of the firm to abfe. It is the increase in profits that would then lead to increase the need to increase productivity, therefore, demand for more employees. An increase in employment would then raise the level of consumer demand, therefore have a positive effect on the real GDP of the economy.
Intermittently, the increase in companies’ profits will lead to an increase in the demand for labor. In turn, this will shift the demand for labor curve upwards. Consequently, this creates an increase in the level of wages paid to workers from w1 to w2.
As noted in the diagram above, a reduction in the level of taxation on companies would result in an increase in the demand for workers. Mainly, this would be because companies would seek to raise their production capacity in order to reap more profit within the reduced tax structure. In turn, their demand for workers in the Australian economy amidst a relatively rigid supply of workers would create an upward pressure on the price paid for the worker’s effort. Thus, this would raise the wage rate. A growth in the number of people earning a relatively large amount of income would result in an upturn in their demand for consumer commodities.
In turn, this would result in an increase in the aggregate demand in the economy that would be used to offset the budget deficit. Apart from this, an increase in the wages of individuals in the economy would lead to an increase in the income tax revenue collected by the government. In turn, this additional revenue would be used to offset any budget deficits within the economy. It is, therefore, worth to note that a reduction in the corporate tax rate would lead to economic growth in Australia, an increase in the wage rates of individuals and a reduction in the country’s budget deficit.
The Reserve Bank of Australia is the authority in charge of setting and implementing the country’s monetary policy. Typically, the monetary authority has various objectives that have to be fulfilled, among them to achieve full employment, economic growth, and maintain price stability in the Australian economy.
Price stability. In order to achieve price stability, the RBA must ensure that the level of inflation in the economy is maintained at minimal levels. As a result, it has set an inflation target with the view of maintaining the consumer price inflation at around 2-3 percent. Notably, this inflation rate is sufficiently low, therefore allows for the prevalence of price stability within the Australian economy. According to the article, the Australian economy was able to maintain a relatively low level of inflation in 2016 (RBA, 2016). Largely, this was attributed to the low growth rates in labor costs and low-cost pressures around the world.
Full employment. The attainment of full employment in the economy is one of the major objectives of the RBA. The monetary authority seeks to achieve high levels of employment in the economy. From the article, one can deduce that although the RBA has been able to reduce the rate of joblessness, full employment is still farfetched (RBA, 2016). Currently, the labor market indicators are mixed, with increases in the growth of employment in the country but slight decreases in the level of joblessness. Nonetheless, forecasts reveal that the rate of joblessness in the country is expected to drop in the medium term.
Economic growth. Notably, this is the main agenda and objective of the monetary policy in Australia. The RBA is tasked with the responsibility of ensuring sustained economic growth in the country. From the report, one can deduce that the Australian economy continues to expand at a moderate rate (RBA, 2016). Mainly, this is attributed to slight increases in household consumption, public demand, exports from the country, and residential construction among others.
According to the article, the country’s monetary authority decided to maintain the cash rate at 1.50 percent. This cash rate is relatively low. It is worth pointing out that a decrease in the cash rate has significant effects on the country’s real GDP as well as the level of inflation. Mainly, this is because the cash rate influences the level of other rates of interest in the economy. More specifically, a decline in the cash rate results in a down surge in the rate at which the central bank can lend to commercial banks. Consequently, if commercial banks can borrow at a reduced rate from the RBA, then they can also lend at a reduced rate to businesses and individuals in the nation. Naturally, a low-interest rate reduced the cost of borrowing in the country. Thus, the level of borrowing from commercial banks increases. Individuals may then use this money to purchase consumer durable goods or investment.
Fundamentally, a low-interest rate in the country will boost the level of investment in the economy. Therefore, the rate of investment in the Australian economy would rise significantly. Consequently, this would increase the demand for workers in the country. Therefore it would lead to an increase in the rate of employment within the economy. Likewise, the employees would spend their money on buying goods and services. In turn, this raises the level of demand in the economy, thereby leading to an increase in the nation’s aggregate demand. A rise in the aggregate demand, therefore, would result in the growth of the country’s real GDP.
Aggregate demand-aggregate supply curve showing impact of interest rate on Aggregate demand and price level n the same view, there is a plausible correlation between the cash rate and the inflation rate within the nation. By and large, the increase in demand in the economy will shift the aggregate demand curve from AD1 to AD2. In turn, this creates an increase in the price level in the economy from P1 to P2. Fundamentally, inflation in the economy would arise if the cash rate reduction results in an increase in the aggregate demand amidst a rigid supply of commodities and services.
A decrease in the cash rate will have substantial effects on the market for loanable funds. Primarily, when banks increase their lending as a result of a decrease in the rate of interest, they create credit, thereby adding to the amount of funds available for investors. Thus, a decrease in cash rate would result in an increase in loanable funds, which then would have an indirect positive impact on the level of real GDP of Australia. The same applies to the reserve market.
It is important to note that the cash rate remains unchanged between 2016 and 2017. The level of economic growth in the country has slightly grown between the two years. In the first quarter of 2017, the Australian economy expanded by about 1.1 percent. Indeed, this is in line with the objectives of the country’s monetary policy (Trading Economics, 2017). Unfortunately, the rate of inflation in the country rose by about 2.1 percent in the first quarter of this year. Notably, this rate of inflation is still within the inflation target rate set by the RBA. Commendably, the rate of unemployment in the country also fall substantially in the second quarter of 2017 (Trading Economics, 2017). Indeed, the monetary authority is doing a commendable job in attaining its main policy objectives in the country.
The last few years has seen prices in the Australian housing market rise significantly. Mainly, this has been attributed to the increase in demand for housing in the country (Fickling, 2016). However, in 2016, the property market began to subdue, and prices in the economy began to cool off (Lui, 2016). In turn, this has created concern by the RBA. In the statement, the RBA reports that it has strengthened measures to reduce the rate of lending in the housing market (Tan, 2016). In turn, this has led to a reduction in the demand for houses in the country, thereby making them affordable for the Australian people.
A tariff is a form of added costs on imported goods. It is a simple form of tax. Notably, international trade increases the number of goods and services. However, free trade is limited through the imposition of tariffs on goods by countries. Therefore, the removal of tariffs on Malaysian solar panels would significantly increase the quantity of the product traded between Australia and Malaysia. Fundamentally, an import tariff on a product increases the price of a product by the level of the import tariff. The signing of a free trade agreement between Malaysia and Australia would remove tariff barriers between the two nations. Therefore, removing the tariff would imply that the price of the commodity would reduce substantially, making Malaysian solar panels cheaper. In turn, this would increase the demand for the product. An increase in the demand for solar panels would encourage the Malaysian producers to increase their supply for the commodity. In turn, this would encourage further production of the commodity.
It is evident from the article that the Martin Wolf prefers a multilateral trade system over bilateral trade. Predominantly, this view is based on the author’s arguments that the move from bilateral trade to multilateral trade decades ago was the beginning of the expansion of trade that has driven global growth. Mainly, this is because multilateral trade seeks to converge trade liberalization to currency convertibility. In addition, multilateral trade takes into consideration that important political differences may exist between countries and therefore caters for these differences through a combination of non-discrimination and reciprocity. Contrariwise, a bilateral system does not provide for this differences. In addition, Wolf favors a multilateral system because he believes that there is no way of ensuring a balance of trade in a bilateral system.
The article mentions the great convergence as brought forwards by Baldwin. From Baldwin’s perspective, the new globalization is all about moving knowledge, instead of trade across nations. According to Baldwin, the revolutionary advancements in ICT has transformed the process of globalization. In his view, better communication has permitted rich nation firms to shift their manufacturing to developing nations. In turn, this led to the sharing of ideas, knowledge and intellectual property between nations. For this reason, He believes that the new form of globalization has broken the G7 countries’ lion share of the world trade (Baldwin, 2016).
More precisely, it has allowed countries with great ICT capacity to infiltrate the global market. The new information flows broken the monopoly that rich nation workers possessed on the use of advanced industrial manufacturing intellectual property. Consequently, they are able to combine high-tech ideas with low-wage workers in developing nations. In turn, this has increased their competitiveness in the international market. It is imperative to note that the Australian economy has great prospects in the new globalization era. If it increases its participation in the sharing of ideas with other nations, the country will develop significantly due to the ‘new globalization’.
References
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Australia Unemployment Rate (2017). Trading Economics. Retrieved 25 May 2017, from https://www.tradingeconomics.com/australia/unemployment-rate.
Baldwin, R. (2016). The Great Convergence: Information Technology and the New Globalization. Peterson Institute for International Economics. Retrieved 25 May 2017, from https://piie.com/events/great-convergence-information-technology-and-new-globalization.
Company tax rates. (2017). Australian Government. Retrieved 25 May 2017, from https://www.ato.gov.au/Rates/Company-tax/.
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Henderson, J. (2017). What economists and tax experts think of the company tax cut. The Conversation. Retrieved 25 May 2017, from https://theconversation.com/what-economists-and-tax-experts-think-of-the-company-tax-cut-72198.
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