Australian Economy: Real GDP, Growth Rate, And Unemployment

Overview of the Australian Economy

Question:

Discuss about the Australian Economic Performance from 2007-2016.

Australian is one of the developed economies and is also one or the world’s largest mixed economy. Its GDP level is very high of over trillion Australian dollars. As at 2016, the GDP record was AUD$1.67 trillion. The economy’s wealth is over 9 trillion. This economy is one of the biggest world international trader. It is ranked 20^th in terms of importation and 25^th in terms of exportation. The service sector is the main component of this economies GDP with over 73% constitute. The mining and manufacturing industries also contribute for a big proportion to its GDP. The performance of this economy is provided by the Reserve Bank of Australia (RBA) and it also makes forecasts based on the economic trend. This economy has experienced growth for 26 years without falling in a recession unlike many other economies. According to Scutt (2016) this economy is very strong that anyone could imagine. The government is employing various policy instruments so as to facilitate better economic performance. In order to promote international trade, the country has engaged with other economies and signed a free trade agreement. These economies include; with the United States, Canada, ASEAN, Chile, Korea, China, Malaysia, Japan, New Zealand, Singapore and Thailand. However despite the economy being said to be strong, Irvine (2017) noted that there have been a reduction in business investment and the economy may be falling into a recession.

Australian Real GDP

Whereas nominal GDP is the GDP measured at current prices, real GDP is that GDP measured at constant prices. This means that it is measured respective to a certain base year and thus it is adjusted for the inflation changes. In an economy, prices may rise or fall over the years; and this may result in unreliable analysis of economic performance. For instance, a price rise may result in policy makers assuming that the economy is performing well which may not be the case. Thus the importance of real GDP is to take the value of produced goods and services as if the price have not gone up or down.

Amadeo (2017) explained that real GDP measurement of the economic performance is tied to only final output. For this he meant that if it’s for a car, the final car is included in the measure but the parts used in making the car are not included. It also include services in its measure. However, not all services are included since some are difficult to measure. The services measured include your bank, hairdresser, and also services provided by non-profits (Goodwill). Some of the excluded service include; black market activities, elder care, childcare, volunteer work for charities.

Real GDP and its Importance

Fig: Australian Real GDP

Imf.org (2017)

The Australian real GDP has been high of over 1,300 billion for the past decade. The trend of this change in real GDP is rising constantly. This means that the year 2007 had the lowest real GDP and the highest was in 2016. A higher real GDP is an indicator of healthy economic performance.

Real GDP growth rate is a measure of the pace at which the economy is growing at. This is the change in the real GDP. This growth rate is estimated at constant prices. The real GDP measures economic performance by comparing the changes f GDP from one quarter to another. The changes of real GDP is experience during the business cycles. It is positive during the expansion of the economy and negative during the contraction.

Fig: Australian real GDP growth

Imf.org (2017)

The Australian economy had the highest real GDP growth rate of 4.5 % in 2007. The rate fell 2.6% in the following year. The year 2009 had the worst growth rate of 1.8%. The growth however rose from 2009 to another peak in 2012 of 3.5%. Again in 2013, there was a big fall to 2 %. In 2014, the growth rose to 2.7%, fell to 2.9% in 2015 and rose to 2.85% in 2016. Overall, the growth rate has a negative trend.

Real GDP per Capital is a measure used in the estimation of the changes in the living standards. It is used in the comparison between different countries. The real GDP per capita is used to measure economic performance as every nation is interested in promoting improved living standards. It is obtained by dividing the real GDP by the total population (Pettinger, 2012).

 

Fig: Australian real GDP per capita

Imf.org (2017)

The real GDP per capita for Australia has almost be constantly rising; the trend is thus positive. There was a constant GDP per capital in 2008 to 2009 of 64,400.The smallest real GDP per capita was in 2007 with the highest being in 2016. The real GDP per capital was approximately 64,150 USD in 2007 and 69,400 USD in 2016.

The Australian government is most concerned with its economic performance. It has ensured a continued economic growth by maintaining a flexible policy framework. The government mostly use either fiscal policy tools or monetary policy tool to stimulate growth (Uren, 2016). Fiscal policy tools entails influencing the spending by the government or its taxes. According to Bindseil (2014), the monetary policy tool entails the influence on the money supply or the cash rate by the Reserve Bank of Australia (RBA). The government was so fast to prevent the 2008 global recession from hurting the economy by providing a stimulus package (Murphy, 2017). The RBA has maintained its cash rate at a very low level to promote growth.

Real GDP Measurement and Exclusions

Unemployment in Australia

Unemployment rate has been defined by various economists as an economic condition in which an economy performance is not healthy and thus the economy is not able to supply sufficient jobs; this situation is such that there are people who can’t get a job despite the vigorous search. Most economies are being faced with the challenges of rising unemployment rate even those that are well performing. It is difficult for an economy to provide jobs that equates the labor demand and thus full employment cannot be achieved.

Fig: Australian Unemployment rate

Source: Tradingeconomics.com (2017)

The Australian unemployment rate can be observed to have been going down before the 2008 recession. In fact, the lowest rate in record was in 2008 (4%). However, there was a sharp rise in the last quarter of 2008 which reached a peak of approximately 5.8% in 2009. There was a fall to a trough of 4.8% in 2011. The rate rose again to another peak of 6.3% in 2015. Since then the rate has been going down (the 2016 record was on average 5.3%). Overall, the trend is positive.

Typical Unemployment Types

The four major typical unemployment types are structural, frictional, cyclical and seasonal. The structural unemployment is experienced from structural changes; globalization is the major source for structural unemployment (Nickolas, 2015). An example is when a technological advancement requires employees to possess some particular skills; failure to which some are laid off. These workers’ previous skills may not be useful to other businesses and thus it’s hard for the laid off employee to get a new job. It occurs when jobs are in plentiful but there is a mismatch of skills. Frictional unemployment is the second type which is experienced by the fresh graduates and those who voluntarily quit their jobs due to lack of satisfaction so that they may look for a better one. It takes time before those who are seeking employment match with the employing firms.

Cyclical unemployment is the third type which is present in all economies since all nations face business cycles. During an expansion cycle where businesses are doing well, many people get jobs since expansion of businesses requires additional labor (Hall, 2010). However, during a contraction period where businesses are contracting, some people lose their jobs since they are laid off to lower operational costs. These people will only get back to their jobs once the businesses recovers again; this may take long. The seasonal unemployment is the last type which is present for various particular productions. In a production process, employees possess unique skills. In a production process with different stages, if the stages are done at different time periods, some people may remain unemployed when their operational stage is not functioning. Immediately the process gets to that stage, these employees get back to their job.

Real GDP Growth Rate

Unemployment Types in Australia

Cyclical unemployment is present in Australia since from the GDP growth analysis we have seen that it has been going fluctuations which indicates that business cycles have been experienced. Frictional unemployment is also present since if a person quits a job, they take long to match another employer. Frictional unemployment is present in all economies since the employers don’t know the potential employees and also the potential employees don’t know all those who are hiring. In addition, the search for the best worker may take time due to a need for interviews and other human resource requirement. Structural unemployment is also present since some job seekers may hear of a job vacancy but the skills requirement fail to match that which they are possessing. They end up not getting the job and they remain unemployed. Finally the frictional unemployment is present in that Australia is a nation of extensive agricultural activities. Some people employed in the farms usually remain unemployed when a certain agricultural stage is exhausted. For instance, after planting, the workers have to wait for the weeding period.

Government Measures

The government’s objective is an attempt to provide the maximum employment possible (nearing full employment). This is by the use of either fiscal policy tools or monetary policy tools. The Australian government ensuring that the interest rate is low is a form of stimulating economic growth. At lower rates of interest, investors are attracted to seeking more capital to invest in new or expand the existing businesses; new businesses and business expansion create more jobs. The Australian government is also increasing its spending on investments which is also creating more jobs.

Inflation in Australia

Inflation is experienced when there is a rapid rise in the general price level Chand (2017). Prices for most goods and services may become very high owing to many factors which will be discussed.

Fig: Australian Inflation rate

Tradingeconomics.com (2017)

The trend observed above is falling; this means that the Australian government has its inflation rate under control.

Typical Causes of Inflation

There are two major cause; one is the demand-pull inflation; here, the demand in the economy rises. An excess demand whereas the supply is inelastic makes the prices to rise. Second is cost-push inflation; here, the cost of production rises such that producers end up raising the output prices so as to maintain their revenues.

Inflation causes in Australia

Real GDP per Capita

Both causes are responsible for inflation rate in Australia. The most commonly cost is the cost-push inflation. For instance, the manufacturing costs are very high in Australia. Unless these firms are allowed to raise their output prices, their operation may not be sustainable in the long run.

Government Measures

The government also uses fiscal and monetary policy tools to bring stability to the general prices. When inflation is stimulated by demand; meaning there is a strong money supply in an economy, the government may either increase taxes to reduced available income or raise the interest rate to discourage borrowing of money. The government may also directly reduce the money supply through the RBA.

Conclusion

In order to determine how much the economy is producing, real GDP is the best measure. It’s effective in that it takes care of any price change that may have resulted over the years. It can be used in comparison of performance between countries since prices are held constant. Real GDP growth is a good measure of performance since even if the economy is growing, the growth may be at a sluggish pace. A fall in real GDP growth does not mean that a country’s real GDP must be falling; it could still be going up. The real growth rate of GDP in has been going up and down over the years. This effect is explained by the presence of business cycles. The economic indicators are indicating a reduced economic health during 2008 and 2009 although insignificant. This is the period of the Global recession of which the Australian economy escaped with less impacts compared to most nations.

The Australian economy is being faced by the rising unemployment challenge. There are many factor responsible for unemployment in which the government is unable to take control. For example, the wage rigidity cannot allow the government to lower wages such that they could be able to supply more labor. Inflation rate is not a major threat to this economy; since the cash rate is still revised downwards, it indicates that inflation rate is still under control.

References

Amadeo, K. (2017). What makes Real GDP so Incredibly Real? The Balance. Retrieved 5 August 2017, from https://www.thebalance.com/what-is-real-gdp-how-to-calculate-it-vs-nominal-3306040.

Bindseil, U. (2014). Monetary policy operations and the financial system (1st Ed). Oxford: Oxford University Press.

Chand, S. (2017). Main Causes of Inflation Derived by Economists. YourArticleLibrary.com: The Next Generation Library. Retrieved 6 August 2017, from https://www.yourarticlelibrary.com/macro-economics/inflation-macro-economics/main-causes-of-inflation-derived-by-economists/32883/.

Hall, E., & Lieberman, M. (2010). Economics: Principles & applications. Mason, OH: South-Western Cengage Learning.

Imf.org. (2017). Report for Selected Countries and Subjects. Imf.org. Retrieved 6 August 2017, from https://www.imf.org/external/pubs/ft/weo/2016/02/weodata/weorept.aspx?sy=2007&ey=2016&scsm=1&ssd=1&sort=country&ds=.&br=1&pr1.x=53&pr1.y=9&c=193&s=NGDP_R%2CNGDP_RPCH%2CNGDPRPC%2CPCPIPCH%2CLUR&grp=0&a=.

Irvine, J. (2017). Uncertain waters ahead for the Australian economy. The Sydney Morning Herald. Retrieved 5 August 2017, from https://www.smh.com.au/comment/uncertain-waters-ahead-for-the-australian-economy-20170603-gwjok8.html.

Murphy, K. (2017). Ten years on, voters say Labor’s $52bn stimulus saved Australia from recession. The Guardian. Retrieved 6 August 2017, from https://www.theguardian.com/business/2017/aug/04/ten-years-on-voters-say-labors-52bn-stimulus-saved-australia-from-recession.

Nickolas, S. (2015). What are some causes of structural unemployment? Investopedia. Retrieved 6 August 2017, from https://www.investopedia.com/ask/answers/050115/what-are-some-causes-structural-unemployment.asp.

Pettinger, T. (2012). Real GDP Per Capita. Economicshelp.org. Retrieved 5 August 2017, from https://www.economicshelp.org/blog/glossary/real-gdp-capita/.

Tradingeconomics.com. (2017). Australia Unemployment Rate | 1978-2017 | Data | Chart | Calendar. Tradingeconomics.com. Retrieved 6 August 2017, from https://tradingeconomics.com/australia/unemployment-rate.

Uren, D. (2016). Australian economy: improved growth likely in 2017. Theaustralian.com.au. Retrieved 6 August 2017, from https://www.theaustralian.com.au/business/opinion/david-uren-economics/australian-economy-improved-growth-likely-in-2017/news-story/326486dc7822e09a9d78ac3bc5af0bef.

Scutt, D. (2016). Australia’s economy is stronger than anyone thought. Business Insider Australia. Retrieved 5 August 2017, from https://www.businessinsider.com.au/australia-gdp-q4-2015-economic-growth-2016-3