Gross Domestic Product of a country is taken as a representative measure for estimating total market value of the economy’s produced goods and services computed in a certain accounting period. GDP does not account for depreciation cost of plants and other capital equipment. This is why it is called a gross national estimate. In national income estimation, GDP is reported in two common ways. One is computed GDP reported based on current year prices. GDP recorded in real terms in known as chain volume measures. The chain volume measure of GDP is actually GDP estimates at constant base year price (aph.gov.au 2018). That is this measures value of national output after eliminating the impact of inflation and thus reflect a more prominent measure of national aggregate.
The essay evaluates economic growth of Australia covering the period of last five years. The essay not only considers economic growth of Australia but also discusses other economic indicators such as unemployment, inflation, export and import, foreign direct investment, resilient nature of the economy and most importantly role of monetary and fiscal policy in promoting economic growth of Australia.
In Australia, Australian Bureau of Statistics published the data on Australian GDP at quarterly interval. The data are published nearly around two months succeeding the quarter of reference year. ABS computes GDP by using three different measures depending on production, income and expenditure. Average of the three estimates are taken as a reliable measure for representing final output (rba.gov.au 2013). This is because the average estimates offset errors in each of the three measures.
Rate of economy’s growth is computed by estimating percentage change in the real GDP between two consecutive years. In case of Australia, the percentage change in trend volume measure captures economic growth of the nation (Hartwell 2017). The figure below produces trend GDP growth in Australia over the last five years.
Figure 1: trend economic growth in last five years
(Source:.abs.gov.au 2018)
Australia’s economy grew at a rate of 2.6 percent in 2013. The accounted growth rate is lower than the long-term growth trend of above 3 percent. The economic growth rate however was stronger than that expected by Reserve Bank of Australia and Economists’ forecast. The growth rate was slower compared to recorded growth in the December quarter. Main growth contributing factors during that time were consumption expenditure, investment spending by government and business inventories and growth of export. In response to a relatively slower growth rate, the Reserve Bank kept the cash rate fixed at the all-time lower level of 2.5 percent. There was not much change in economic scenario in 2014, as growth rate remained same as 2.6 percent.
Economic growth however declined by 0.2 percentage point to 2.4 percent in 2015. Nominal GDP during this time recorded the weakest ever growth rate of 1.8 percent during this year. The economy in the past showed considerable resilience in response to global shocks. One factor that caused tension in the economy in this time was a volatile global commodity prices resulted in a considerable decline in nation’s terms of trade (Reid and Coiacetto 2017). Another factor contributed to economic contraction was complicated economic phase of China. In the last five years of growth experience, economic growth recovered only recorded an increase in the year 2016. The rate of economic growth increased to 2.8 percent during this year. The accounted growth rate was highest since the third quarter of 2012. The ABS report identified final consumption expenditure by household and growth of export (Scutt 2016). The contribution of export in economic growth was 1 percent while that of household consumption contributes 0.4 percentage points. Beside these two factors, consumption expenditure made by government and private investment were regarded as contributing factors of economic growth.
Economic growth again lowered to 2.0 percent in 2017. The economic growth failed to match the market expectation (abc.net.au 2018). Main factors dragging the economic growth include decline in net export especially in tourism and rural goods, contraction in residential construction, steep fall in construction and large-scale engineering.
Figure 2: Unemployment rate in Australia
(Source: tradingeconomics.com 2018)
As reflected from the above figure, there is an overtime decline in the recorded unemployment rate. Unemployment rate represented in seasonally adjusted measure documented as 5.3% in the August quarter of 2018. Number of person unemployed has increased due to the increase job seekers for part time jobs and that of a decrease in job seekers for part time jobs. Employment increases significantly contributing to an increase in labor force participation.
Figure 3: Export of Australia
(Source: tradingeconomics.com 2018)
Australia’s export lowered by 1 percent to become AUD 36.0 billion the second quarter of 2018. Export of non-rural goods especially that of mineral and metal ores declined significantly. Export of rural goods particularly that of cereal grains declined (tradingeconomics.com 2018). As against a drop in rate of goods export, the rate of service export remained almost at the same level.
Figure 4: Import of Australia
(Source: tradingeconomics.com 2018)
The volume of imported gods remained almost unchanged in the second quarter of 2018. Import of intermediate and merchandise imports increased by 6 percent with main drivers being fuels and lubricants. Service import on the other increased by only 1 percent with primary service being transport, travel and other services.
Figure 5: Inflation rate in Australia
(Source: tradingeconomics.com 2018)
In the last five years, inflation in Australia mostly constituted a downward trend. However, in the second quarter of 2018, inflation slightly increased to 2.1 percent compared to 1.9 percent in the previous period. The recorded inflation rate is lower than market expected rate of 2.2 percent. The last recorded inflation rate is the highest since first quarter of 2017 (aph.gov.au 2018). Increase in price level is mainly due to an increased price of tobacco, fuel and electricity.
The net international liability position of Australia stood at $8986.2 billion as of December 2017 recording an increase by $8.7 billion compared to the previous year. Australia’s foreign investment increased to $3266.4 billion at the end of the year of 2017 marking a 3% increase. In Australia, portfolio investment accounted to be $1769.6 billion, direct investment recorded to be $849.1 billion, other form of investment and financial investment recorded to be $494.8b and $153.0b respectively (Rogers, Lee and Yan 2017). Major investors in Australia are USA, UK, Belgium, Hong Kong, Singapore and Japan.
Figure 6: Foreign investment in Australia
(Source: abs.gov.au 2018)
Nature of assets in Australia
Housing market in Australia is considered as one of the top performing assets of the world. Several factors lead to gain in housing price of Australia. Factors affecting assets price in housing include population growth, level of indebtedness, mortgage rate, level of household income, tax and other policies of social security and supply. Population growth and indebtedness are the two significant factors influencing housing asset in Australia. Indebtedness has been fueled by the declining interest rate.
Shares of Australia is the fifth best performing assets in world (Collett 2018). The long-term investment report of ASX confirms that in the past few years, residential property market assets are the top performing asset of Australia.
It is since the last twenty-five years that Australia had a recession. This however does not mean that unemployment rate in the economy had not fluctuate at all. Rate of unemployment experienced an increase in the respective years of 1996, 2001, 2009 and that of 2013; the fact is that growing unemployment yet not caused recession in the economy as the economy immediately got back to the stable position (Koo 2014).
Economic growth of China had a significant role in non-interrupted economic growth of Australia. Australia gained considerable benefit from the new innovative growth model of China relied on digging out resources from underground and sold to economically developed nations. More than 32 percent export from Australia went to China consisting mostly raw materials. However, export of Australia declined slightly during 2009. In recent years, China however experienced an economic contraction. The mining sector contracted is significantly since 2012 aggravating the unemployment problem. Still the economy has been kept protected from any economic recession (washingtonpost.com 2018). This is because of the ability of Australia to cut the interest rate whenever it is necessary. The other countries do not possess such adjustment capacity as the interest rate is already settle at a low level that might go to zero or even negative. Australia however is in an advantageous position because of the smarter Central bank.
In determination of economic growth, macroeconomic policy tools play an important role. The most commonly discussed macroeconomic policy tools include fiscal and monetary policy. Design of these policies and proper execution help in achieving sustainable and stable economic growth.
Fiscal policy
Fiscal policy works through changes in composition and level of government spending, alteration in types and rates of taxes and borrowing of government. Government has the power to affect domestic economic activities directly through capital and recurrent expenditure. Change in expenditure, transfer payment and taxes have indirect influence economic activities.
Government also takes discretionary policy action to protect the economy from internal and external instability. Stimulatory fiscal package constitutes an example of discretionary fiscal policy (Argy and Nevile 2016). Automatic stabilizers reflect types of expenditures that are relatively less responsive to economic activity. These have a stabilizing influence on aggregate demand and work without need of specific government action.
In Australia, fiscal policy is conducted following Charter of Budget Honesty Act 1998. This imposes a basic requirement for Australian government to design and report to a medium terms fiscal strategy. The framework of medium term fiscal strategy follows the principles of a sound management of fiscal position including government debt and management of fiscal risk, state of economic stability, national saving, integrity and stability of the tax base and balance across generations (aph.gov.au 2018). Government medium term focus influence of either automatic stabilizers or discretionary policies.
Monetary policy
The Reserve Bank of Australia has the responsibility to design monetary policy for the economy. RBA implements monetary policy action through changing cash rate. In the money market cash rate is determined by the demand and supply of overnight funds. RBA by changing cash rate influences interest rate in the financial system. Change in cash rate affects domestic economic activity by influencing savings and investment, expenditure by household, credit supply, exchange rate and prices of assets.
Monetary policy is set by RBA with the aim to achieve selected policy targets following Reserve Bank Act in 1959. The objective include stability in currency, promotion of full employment, welfare and economic prosperity (Bell 2017). RBA targets to maintain an inflation ranged from 2 to 3 percent. Target of RBA for a stable and low inflation in turn achieves a stable and strong growth for Australian economy.
Conclusion
The essay summaries growth performance of Australia over the last five years. The Australian economy is currently recording below average growth rate. Transition in China’s economic growth, decline in export and contraction of housing industry cause a shrink of economic activity. Unemployment rate declined overtime. The increase in employment however is observed mostly in part time jobs. For rate of inflation, after remaining considerable stable for a long period inflation has increased slightly in the ongoing year mainly due to an increase economic prices of fuel, tobacco and electricity. Export of both rural and non-rural goods declined while service export remains unchanged. On the other hand, Australia records an increase in both goods and service imports. Level of foreign investment in recent year increased compared to the previous year. Foreign invest channel in the form of direct investment, portfolio investment, financial derivative and others. Property market share are considered as the most highly yielding shares of Australia in last few years. Both fiscal and monetary policy are at play for securing a sustainable growth for the economy.
References
ABC News., 2018. Australia’s economy grew by 2.4 per cent in 2017, below expectations. [online] Available at: https://www.abc.net.au/news/2018-03-07/gdp-q4-2017/9522450 [Accessed 28 Sep. 2018].
Abs.gov.au., 2018. 5204.0 – Australian System of National Accounts, 2016-17. [online] Available at: https://www.abs.gov.au/AUSSTATS/[email protected]/DetailsPage/5204.02016-17?OpenDocument [Accessed 28 Sep. 2018].
Abs.gov.au., 2018. 5352.0 – International Investment Position, Australia: Supplementary Statistics, 2017. [online] Available at: https://www.abs.gov.au/ausstats/[email protected]/mf/5352.0 [Accessed 28 Sep. 2018].
Aph.gov.au., 2018. Gross domestic product – Parliament of Australia. [online] Available at: https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/MSB/feature/FeatureGDP [Accessed 28 Sep. 2018].
Aph.gov.au., 2018. The tools of macroeconomic policy—a short primer – Parliament of Australia. [online] Available at: https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/BriefingBook44p/MacroeconomicPolicy [Accessed 28 Sep. 2018].
Argy, V.E. and Nevile, J., 2016. Inflation and Unemployment: Theory, Experience and Policy Making. Routledge.
Bell, S., 2017. Great Ideas of Central Banking: Values, Ideas and the Transformation of Central Banking and Monetary Policy in Australia. In Government Reformed (pp. 35-54). Routledge.
Collett, J., 2018. Australian shares only fifth-best performing asset class over 10 years. [online] The Sydney Morning Herald. Available at: https://www.smh.com.au/money/super-and-retirement/australian-shares-only-fifthbest-performing-asset-class-over-10-years-20170728-gxkpgq.html [Accessed 28 Sep. 2018].
Hartwell, R.M., 2017. The industrial revolution and economic growth. Routledge.
Koo, R.C., 2014. The escape from balance sheet recession and the QE trap: a hazardous road for the world economy. John Wiley & Sons.
Reid, S. and Coiacetto, E., 2017. Legislative policy environment as facilitator of foreign residential investment in Australia. Pacific Rim Property Research Journal, 23(3), pp.303-320.
Reserve Bank of Australia., 2013. GDP Revisions: Measurement and Implications | Bulletin – March Quarter 2013. [online] Available at: https://www.rba.gov.au/publications/bulletin/2013/mar/2.html [Accessed 28 Sep. 2018].
Rogers, D., Lee, C.L. and Yan, D., 2015. The politics of foreign investment in Australian housing: Chinese investors, translocal sales agents and local resistance. Housing Studies, 30(5), pp.730-748.
Scutt, D., 2016. Australian economic growth is roaring. [online] Business Insider Australia. Available at: https://www.businessinsider.com.au/australia-q1-gdp-report-2016-6 [Accessed 28 Sep. 2018].
Tradingeconomics.com., 2018. Australia Imports | 1971-2018 | Data | Chart | Calendar | Forecast | News. [online] Available at: https://tradingeconomics.com/australia/imports [Accessed 28 Sep. 2018].
Washington Post., 2018. How australia has avoided a recession for 25 years. [online] Available at: https://www.washingtonpost.com/news/wonk/wp/2016/09/15/how-australia-has-avoided-a-recession-for-25-years/?noredirect=on&utm_term=.1b0670920589 [Accessed 28 Sep. 2018].
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