Macroeconomic performance refers to the assessment of the performance of an economy towards reaching the goals and objectives of the government policies. The primary aim of the government policies are usually the improvement in the wellbeing of the population of the nation. The performances are measured in ‘Real’ terms, which mean the actual performances are adjusted with price rise. i.e. inflation. Macroeconomic indicators are those, which are concerned with the overall economical concerns, that is, which represent a broad picture of a country. Those indicators are Gross Domestic Product (GDP), Consumer Price Index (CPI), Unemployment, etc. (Burda and Wyplosz 2013). Through the assessment of Net Exports, Real Interest Rate, and Exchange Rate, the performance of an economy can be described in a much better way. The following report illustrates the comparison of macroeconomic performance of Australia and United States for the span of 30 years, starting from 1985 to 2015-2016. In this report, the real GDP growth rate, exchange rate movement, real interest rate and net exports growth rate of the two developed countries will be discussed to highlight the economic performances in the past 30 years.
The Australian economy is one of the most developed and biggest mixed market economies of the world. The country has a GDP of AUD 1.69 trillion in 2017. In terms of wealth per adult, Australia takes the second position, after Switzerland. By nominal GDP, Australia was the 14th nation and 20th largest in terms of PPP. It also holds the 25th position for exporting and 20th position for importing of goods. In 2016, total export value was worth of AUD 190.2 billion and total import value was worth of AUD 196.1 billion. Australia is the only country that holds the record of longest uninterrupted GDP growth run among all the developed countries till March 2017. It has been 26 years since Australia faced a technical recession. Hence, it is a remarkable performance by the Australian economy. Along with the continuous growth, Australia has witnessed low levels of unemployment, average inflation, lower public debt, and a stable and strong financial sector (Greasley et al. 2017).
The economy of the USA is extremely developed. It also has a mixed economic system like Australia. By nominal GDP, the USA economy is the world’s biggest economy and second biggest in terms of PPP. In 2016, the GDP of United States was USD 18.46 trillion. Per capita nominal GDP of USA holds the 7th highest position. The currency of USA is the most commonly used currency and primary reserve currency of the world. Hence, the exchange rates are mostly determined against US dollar. Many countries use the US dollar as their official currency and some others use it as de facto currency (Kim 2013). In 2016, the country exported worth of $1.45 trillion and imported worth of $2.25 trillion. The economy is mostly capitalist, with private business firms and individuals making most of the decisions. The US economy faced a severe financial crisis in 2007-08, which had a wide effect on the international economy. The country faced a real low down in the economy, with a very high unemployment level, very high public debt, and lower economic growth. However, the economy started to recover from the second half of 2009. By 2016, the level of unemployment has come down to 4.7% from 10%. The level of public debt was slightly over than 100% of the GDP in December 2014. By 2017, the US economy has claimed its earlier position (Leimbach et al. 2017).
The pairwise graphs are helpful in understanding the level of economic performance of Australia and the United States and make the comparison easier. Data have been collected from the World Bank. The macroeconomic indicators are real GDP growth rate, net export growth rate, exchange rate movement, and real interest rate.
GDP is the Gross Domestic Product of a country. The total value of the final production of goods and services, produced within the geographical border of the country within a specific time period is known as the GDP. It is classified in two types: real and nominal. The nominal GDP is the value of the production in terms of current prices, while real GDP is inflation adjusted. Hence, real GDP value is always less than nominal GDP. Real GDP represents the actual growth of the economy since it takes into account the level of price rise (Salvatore 2012). GDP growth rate represents the health of the economy and how fast it is growing. A high level of GDP represents the idea that the economy of the nation is strong and growing.
Figure 1 depicts the real GDP growth of Australia and the United States. It is a pair wise graph, which helps in making comparison of the two countries. From the data, it has been found that, both the countries have experienced a steady growth in real GDP from 1985 to 2015-16. The value of GDP was extremely high in USA and it kept on increasing at a very high rate over the years. On the other hand, Australia has witnessed a steady and stable growth of GDP, although the amounts are quite lower than the US economy. The values are all depicted in terms of current USD (billions).
Australian economy is mostly dominated by the service sectors, contributing 61.1% of the country’s GDP and employed about 79.2% of the population of the country in 2016. The country exports 64% of the product to the East Asian nations. Another major source of growth is the resource sector of Australia. The country has immense stock of natural resources and hence, the mining sector is one of the biggest sectors of the economy (Heijdra 2017). In 2010-11, the mining boom happened in Australia, and the sector contributed almost 8.4% of the total GDP of Australia. Although the resource mining is not the primary sector anymore, still the country has stable and strong economy, and has not experienced recession since 1991. During the global financial crisis, the World Bank predicted 3.2% growth rate for Australia, however, it surpassed the prediction and generated 4.3% growth. In the last two decades, the other sectors of the economy grew at a fast pace. Hence, the economy did not have to depend only on the mining sector for growth (Céspedes and Velasco 2012).
On the other hand, USA is the most influential largest economy in the international financial market. This economy is driven by the huge amount of natural resources, worth of $45 trillion in 2016-17. Along with that, the highly developed infrastructure, and high level of productivity have led immense growth in the country. The USA is the third biggest producer of oil and gas in the world, and currently holds the place of largest trading nation. The country not only has a huge domestic market for goods and services, but also has a huge international customer base for its products. There is a free trade agreement between USA and Australia, namely, Australia-United States Free Trade Agreement and a treaty by the name ANZUS. These have helped in growth of both the economies. USA is the fourth biggest export market of Australia and second biggest source of imports. The USA is the largest investor in Australia, while the latter is the fifth biggest investor in USA (treasury.gov.au 2013).
From the above graph, it can be seen that, over the years, USA has a steady growth rate, while the growth rate of Australia has been very much fluctuating. However, the growth rate has been mostly positive in these 30 years. While, USA has experienced a stable growth without much high fluctuations.
Another major macroeconomic indicator is the net exports. Net export is the difference between exports and imports of a country. The net export represents the export and import level of the country. When the export is higher than imports, the value of net exports is positive and when import value is higher than export, the net export value is negative. This indicates the country’s position in the international trade market. The net export growth rate is the rate of change in the net export of a country per year (Fazzari and Papadimitriou 2015).
The above figure shows that, both the countries had stable net export growth over thirty years. It has been depicted as a percentage of GDP. The value of growth is quite low, mostly negative for both Australia and USA. It indicates that the imports were much higher than the exports in both the countries. Although the economy of the countries were strong, still they have imported more than what they had exported. In 2003-2004, Australia’s export volume became weak, due to domestic supply limitations and record hike in the exchange rate. Figure 3 supports this fact of exchange rate hike. Backed by strong demand in the domestic market, and lower prices, level of imports increased significantly. This resulted in substantial fall in the net exports and current account deficit widened (treasury.gov.au 2013).
For the USA, the import level was always higher than the exports; hence, the net export growth values are negative. During the years of financial crisis, the net export fell to its lowest, as seen in the above graph. USA is the 2nd largest importer of the world after EU. The country imports mostly capital and consumer goods and exports goods like commercial aircraft, industrial supplies etc. Over the span of 30 years, the country has experienced long years of growth as well as financial crisis, recession and unemployment (D’Agostino, Gambetti and Giannone 2013).
Exchange rate is the price of a currency in terms of another currency. Usually, most of the currencies of the world are pegged against USD. Before 1971, the Australian dollar was pegged against GBP. Since 1971, it was pegged against USD. Since 1985 to 2015, the exchange rate of AUD to USD stayed within 1 to 1.5, except for a few years such as, 1998 to 2003. It peaked in 2002-03, making Australia’s currency costlier. Hence, exports became expensive and imports became cheaper. Thus, during this period, Australia’s exports fell substantially and imports increased significantly, leading to a huge fall in net exports. However, a stronger and stable exchange rate has helped in the growth of both the economies (Berman, Martin and Mayer 2012).
Real interest rate represents the rate of interest that the investors receive after adjustment for inflation. This rate depends on the inflation rate of the economy. The central bank of an economy lowers the real interest rate to stimulate the economic growth. When money is cheaper, people would be interested to borrow money to invest, consume and spend. This would help in economic growth (Woodford 2012). During the global financial crisis, the RBA had cut the interest rates to 3.5% from 7.5% (Phillips 2015). This had saved the economy from being affected by the financial crisis. USA also had cut down its interest rates after the financial crisis and recession.
It is seen that, from 1985 to 2000, the rate of interest was very high in both the countries. After 2000, the interest rates have gone down significantly. This resulted in economic growth of the country. However, the rate of interest in Australia is much higher than that in the USA (TheGlobalEconomy.com 2016).
The above figure shows the level of cash rate in Australia. During the early 1990s, it was very high and gradually decreased over the years. Due to expansionary fiscal policies, RBA had decreased the cash rate.
USA also adopted the expansionary fiscal policies and the rate of interest gradually decreased, although some fluctuations are there.
Conclusion
Australia faced a severe recession period in early 1990s. The Dow Jones Industrial Average fell hugely, by 22.6%. This collapse was more than what happened during the great depression of 1929-30. However, the global economy handled this shock and the stock market of Australia recovered swiftly. During the same time, in the USA, the loans and saving industry faced a fall too, leading to loans and savings crisis. The overall wellbeing of the Americans were hampered. Hence, the recession affected the global economy, including USA and Australia. During that recession, the GDP of Australia fell by 1%, unemployment rose by 3.4% and unemployment rate reached its peak, 10.6%. However, inflation was reduced in the country. Later half of 1990s was the era of globalization and economic liberalization for the whole world. There were economic reforms, changes in monetary and fiscal policies of the governments of both the countries, which helped in economic growth after 1996. In Australia, Goods and services tax were imposed in 2000, labor markets were deregulated in 2006. Currently, Australia is one of the most liberal and open economies of the world, with two decades of uninterrupted economic growth, low inflation and relatively lower unemployment.
Similarly, USA also faced decades of growth. US President Ronald Reagan introduced Reaganomics in 1981, which are mainly expansionary fiscal policies, such as reducing federal income taxes by 25%. Inflation dropped to 3% in 1983 from 13.5% in 1980. At the end of 1989, with more than 20 million of new jobs, rate of unemployment fell under 6%. In the next few decades, there was economic growth, boom in production, globalization and economic liberalization, which made USA one of the most developed, stable and largest economies of the world.
References
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