Economics For Decision Making: Analyzing The Current State Of The Australian Economy And Its Management

Economic indicators of Australia

Discuss about the Economics for Decision Making.

The report addresses the key economic indicators of Australia such as GDP growth rate, unemployment rate, inflation rate and terms of trade. The indicators helps the viewers know the economic condition of nation and analyze how well is the economy performing. It helps in analyzing whether the economy is growing progressively or is degrading and the reasons for its performance. Macroeconomic policies are the policies used by the government and banks to stabilize the condition of the economy and help it achieve the set targets and goals. There are two types of macroeconomic policies that are monetary policy and fiscal policy. Monetary policies are the policies that are used to control the money supply in the economy and the government to determine tax level uses fiscal policies. The report analyzes the set target of each indicator and suggests the policies and ways the economy can achieve its set targets and goals. The primary aim of the report is to analyze the current state of Australian economy and its management by federal government (Downes et al., 2014).

GDP growth rate: Gross domestic product is the monetary value of all the final goods and services produced in an economy. The GDP growth rate is used to measure the economic growth of the country and its performance in world.

Unemployment rate: unemployment rate is the rate to measure joblessness in the economy. It is the number of people looking for job as a percentage of total labor force.  

Inflation rate: inflation rate is the rate at which the prices of goods and services in an economy rise during a certain period (Abubakar, 2016).

Terms of trade: terms of trade are the price at which the goods and services are traded between two nations. It is the price of imports and exports (Deardorff, 2014).

Year	GDP growth rate percentage	Unemployment rate percentage	Inflation rate percentage	Terms of trade index point	Current account percentage
2005	3.2	5.0	2.7	131.1	-6.3
2006	3.0	4.8	3.5	145.5	-6.1
2007	3.8	4.4	2.3	152.4	-7.5
2008	1.8	4.2	4.4	174.6	-4.9
2009	1.8	5.6	1.8	163.0	-5.3
2010	2.0	5.1	2.8	178.9	-3.9
2011	2.4	5.1	3.3	200.4	-3.2
2012	3.6	5.2	1.8	182.0	-4.3
2013	2.4	5.7	2.5	177.0	-3.3
2014	2.5	6.1	2.5	165.1	-3.0
2015	2.2	6.1	1.5	83.3	-4.4
2016	3.3	5.7	1.6	80.5	–
2017-2020	2.7	6.00	1.90	82.34	–

Table 1: Economic indicators of Australia

(Source: World Bank Group, 2016). 

The value of Australian dollar at present is 1 Australian dollar is equal to 50.75 Indian rupee.

Macroeconomic policies are the policies that is used by federal government and reserve bank of Australia to stabilize the economy and help the economy achieve set targets and goals.

Monetary policies are policies set by the reserve bank of Australia to control the money supply in the economy and the economic growth rate. The main component of monetary policy is cash rate or the rate of interest. Cash rate is the rate at which the reserve bank lends money to commercial banks. Investment and demand depends of this cash rate only. Lower the interest rate higher will be money supply and investment in the economy and higher the rate of inflation. The tools of monetary policies are Open Market Ratio (OMO), bank interest rates or the cash rates in terms of Australia; Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) (Fenna, 2013).

Year	Real Interest rate percentage
2010	6.2
2011	1.5
2012	4.8
2013	6.4
2014	4.5
2015	6.3
2016	2.25

Current macroeconomic policies of Australia

Table 2: Interest rate in Australia

(Source: World Bank Group, 2016). 

Figure: Interest rate changes in Australia

(Source: created by author)

The above table indicates that the Reserve bank of Australia is decreasing the cash rate or the interest rate in order to increase the money supply in the economy and boost investment. The loans are available at lesser rate that will encourage new start-ups in the economy. This policy is mainly adopted to solve the problem of unemployment (Shimer, 2012). Monetary policy affects the interest rate and ultimately the rate of inflation. Monetary policies are used to achieve full unemployment, price stability, economic prosperity and welfare of the people of Australia. The inflation target is usually set at 2-3 percent in order to ensure sustainable growth (Australian Bureau of Statistics, Australian Government., 2016). Since, Australia adopts floating exchange rate the monetary policy includes management of short-term interest rates to achieve domestic policy. The Reserve Bank Act 1959 states the objectives of monetary policies in Australia as:

• Stabilizing the currency of the nation,
• Achieving full employment level in Australia,
• Maximizing economic prosperity and welfare of the people (Galí, 2015).

The investment in the Australian economy is decreasing. The Reserve Bank of Australia has decided to reduce the cash rate to encourage investment in the economy. This is also done to improve the unemployment rate and solve the problem of joblessness. The above analysis shows that the interest rate is falling from the year 2011. The main tool of monetary policy is the interest rate that greatly affects the monetary policy of the economy. The main objective is to control the money supply in the economy to stimulate growth, achieve high employment, increase GDP and maintain the inflation rate (Fraser et al., 2014).

Fiscal policies are policies used by the government to control the functioning of the economy by altering the government expenditure and tax rates. The two main tools of fiscal policies are tax rate and government expenditure. When the government wants to stimulate the growth condition in the economy it increases the government spending and decreases the tax rate. This will increase the money supply in the economy and stimulate demand (Auerbach & Gorodnichenko, 2013).

The main aim of the Federal government in Australia is to improve the unemployment rates, control inflation, and stabilize the price and the business conditions. This is controlled through government spending and fiscal policies by the government of Australia. The multiplier of government expenditure is greater than one while the multiplier of taxes is negative. There is a need for the government to expand its infrastructure in order to improve unemployment rate. The infrastructure is well developed that indicate that the concentration of the government is on improving the infrastructure (Hansen, 2013).

Monetary Policy

Figure: GDP growth rate

(Source: created by author)

Figure: unemployment rate

(Source: created by author)

Figure: inflation rate

(Source: created by author)

The above table indicates that Australian economy is growing and the economic performance is improving. The economy of Australia is growing faster than expected by the economists. The main reason for the growth of the economy of Australia is mining of iron ore and exporting natural resources to China and other developing countries. The rate of inflation is low as the prices of the commodities are falling in the Australian economy (Lowe, 2012). The Australian economy is facing current account deficit, as the values of imports is higher than the exports. Since the economy of China has transformed from investment economy to service sector economy, the demand for commodities as decreased. Exports of Australia have decreased due to this reason, which is why current account is in deficit. Australia is in thirteenth position in the world in terms of growth (Manalo et al., 2015).

Conclusion

The above analysis shows that the main aim of the government in Australia is to improve the unemployment rate and stabilize the economy of Australia. The policy adopted by the Australian government aims at achieving the set inflation target rate and improving the unemployment rate. The economy uses the tool of interest rate and government expenditure to achieve its goals and objectives. It is essential for the government to increase its expenditure in order to improve the unemployment rate and achieve the set forecast. The economy of Australia is growing faster than expected that is bad for the economy as it will not be able to cope up with the growth. The current account of the economy is in deficit, which should be taken account by the reserve bank of Australia. It is essential for the economy to increase its exports and reduce imports in order to improve trade. Adopting right policies will help the economy achieve better goals. The main problem with the Australian economy is regarding the high unemployment rate while the inflation rate is within the set inflation target.

References

Abubakar, A. M. (2016). Inflation Targeting as a Monetary Policy Framework: A Critical Appraisal. Imperial Journal of Interdisciplinary Research, 2(6).

Auerbach, A. J., & Gorodnichenko, Y. (2013). Output spillovers from fiscal policy. The American Economic Review, 103(3), 141-146.

Australian Bureau of Statistics, Australian Government. (2016). Abs.gov.au. Retrieved 22 September 2016, from https://www.abs.gov.au/

Data | The World Bank. (2016). Data.worldbank.org. Retrieved 22 September 2016, from https://data.worldbank.org/

Deardorff, A. V. (2014). Terms of trade: glossary of international economics. World Scientific.

Downes, P., Hanslow, K., & Tulip, P. (2014). The effect of the mining boom on the Australian economy. Reserve Bank of Australia.

Fenna, A. (2013). The economic policy agenda in Australia, 1962–2012.Australian Journal of Public Administration, 72(2), 89-102.

Fraser, P., Macdonald, G. A., & Mullineux, A. W. (2014). Regional monetary policy: An Australian perspective. Regional Studies, 48(8), 1419-1433.

Galí, J. (2015). Monetary policy, inflation, and the business cycle: an introduction to the new Keynesian framework and its applications. Princeton University Press.

Hansen, A. H. (2013). Fiscal policy & business cycles. Routledge.

Lowe, P. (2012). The changing structure of the Australian economy and monetary policy. The Recent Economic Performance of the States 1 Trends in National Saving and Investment 9 The Distribution of Household Wealth in Australia: Evidence from the 2010 HILDA Survey 19 India’s Steel Industry 29, 79.

Manalo, J., Perera, D., & Rees, D. M. (2015). Exchange rate movements and the Australian economy. Economic Modelling, 47, 53-62.

O’Donnell, C. J. (2014). An economic approach to identifying the drivers of productivity change in the market sectors of the Australian economy. Centre for Efficiency and Productivity Analysis Working Papers WP02/2014.

Shahiduzzaman, M., & Alam, K. (2014). Information technology and its changing roles to economic growth and productivity in Australia.Telecommunications Policy, 38(2), 125-135.

Shimer, R. (2012). Reassessing the ins and outs of unemployment. Review of Economic Dynamics, 15(2), 127-148.

Tranding Economics | 300.000 INDICATORS from 196 COUNTRIES. (2016). Tradingeconomics.com. Retrieved 22 September 2016, from https://www.tradingeconomics.com/