Evaluation Of Macroeconomic Performance Of Australia And USA From 1995 To 2015

Key Macroeconomic Indicators

Australia when compared in terms of GDP, ranked second in the world. The economy stands just behind USA. In the past two decades, Australia successfully maintained a steady growth along with low inflation and low unemployment.  Service sector constitutes a dominating share in the Australian economy with the share being 70 percent in GDP ad 75 percent in employment. The steady banking and financial sector has helped the economy to escape from global economic crisis (Nielsen, 2017) Australia is largely benefitted by a dramatic increase in terms of trade in recent years.  Australia is a leading exporter of energy, natural resource and agricultural commodities.

The USA economy is considered as the highly developed mixed economy. The economy account world’s largest nominal GDP and second highest purchasing power parity. The economy has a highly developed and diversified industrial sector. The huge stock of natural resources, infrastructural facilities and high productivity fueled economic growth of the economy. The great recession in 2008 caused a huge economic downturn in USA (Reinhart, C.M. and Rogoff, 2015) The economy took a considerably long time to recover attack of crisis and return to previous growth rate.

The paper prepares a brief report on economic performance of Australia and USA for a period of twenty-one years from 1995 to 2015.

Macroeconomic performances of a nation are evaluated based on some key economic indicators.  Growth of aggregate output is a primary indicator of economic performance. Aggregate output of a nation is measured in terms of GDP of the nation.  Gross Domestic Product or GDP is a standard measure for computing value of produced in an accounting year. Changes in GDP from one year to the next is known is growth rate of GDP (Goodwin, et al., 2015). Growth in the aggregate output is considered as economic growth. GDP growth becomes more accurate measure of economic growth when aggregate output is valued using market price of a base year. This is then called real GDP growth rate. The movement of price level is next important determinant of economic stability. This is examined by observing the trend in inflation rate. Rate of inflation is the percentage change in the consumer price index which include a certain basket of goods and service necessary for sustaining everyday life. Steady economic growth and stability in the price level have implication for labor market (Uribe and Schmitt-Grohe, 2017) State of labor market in an economy is determined from the trend in unemployment rate. Unemployment refers to an economic condition of labor where some members of the labor force are unable to find jobs despite active job search.  Real interest rate has implication for investment in the economy. To understand trend in real interest rate, the paper considers interest rate determined by the central banks of the respective nations. Two indicator related to degree of openness of a country are exchange rate and net export. Net export refers to the trade balance in the current account of balance of payment and it obtained by subtracting values of import from that of export. Higher the value of net export higher is the economic growth and vice versa (Heijdra, 2017). One important determinant of international trade is exchange rate between nations. It is unit of one country’s currencies exchanged for unit of another currency.

Summary Statistics of Australia

This section discusses the summary statistics of above mentioned indicators for the selected time frame for both Australia and USA.

Real GDP growth rate
Mean	3.29
Standard Error	0.19
Median	3.63
Mode	#N/A
Standard Deviation	0.89
Sample Variance	0.79
Kurtosis	-0.86
Skewness	-0.13
Range	3.19
Minimum	1.81
Maximum	5.01
Sum	69.15
Count	21

The summary statistics for real GDP growth shows that average growth for Australian economy from 1995 to 2015 is 3.29. An important aspect of economic performance is the stability in the economic growth. obtained standard deviation for series of real GDP growth is 0.89. As standard deviation smaller relative to average growth rate, there is a stability in economic growth of Australia (Salahuddin, et al., 2015). In the selected time range, Australia attained an all-time high growth rate of 5.01 percent in 1999. The lowest economic growth rate of 1.81 occurred immediate after the year of global financial crisis.

inflation rate
Mean	2.66
Standard Error	0.26
Median	2.61
Mode	#N/A
Standard Deviation	1.18
Sample Variance	1.40
Kurtosis	-0.30
Skewness	0.00
Range	4.39
Minimum	0.25
Maximum	4.64
Sum	55.86
Count	21

The mean inflation rate of 2.66 percent implies that price level in the economy grew at an average rate of 2.66 percent. Stability in the price level can be predicted from a relatively lower standard deviation for inflation rate in the selected sample period. The estimated standard deviation is 1.18. The inflation rate in the economy varies between a maximum of 4.64 percent and a minimum of 0.25 percent.

unemployment rate
Mean	6.10
Standard Error	0.28
Median	5.90
Mode	8.50
Standard Deviation	1.29
Sample Variance	1.67
Kurtosis	-0.38
Skewness	0.67
Range	4.30
Minimum	4.20
Maximum	8.50
Sum	128.10
Count	21

Summary measure of unemployment series reveals that rate of unemployment in Australia on an average was 6.10 percent. The standard deviation for unemployment is 1.29. this implies lower variability in the measured unemployment that is in most of years’ unemployment rate remain closer to that of the average unemployment rate (Denny and Churchill, 2016). Unemployment rate in the economy varies between the range of 8.50 and 4.20.

Interest rate
Mean	4.74
Standard Error	0.31
Median	4.75
Mode	4.75
Standard Deviation	1.44
Sample Variance	2.07
Kurtosis	-0.27
Skewness	-0.20
Range	5.50
Minimum	2.00
Maximum	7.50
Sum	99.50
Count	21

The Reserve Bank of Australia determines the cash rate in the economy. The cash rate for Australian economy is on average remained at 4.74. In order to maintain a stability in the economy RBA prefers to keep the cash to a relatively stable state (Makin, Pearce and Ratnasiri, 2019) For the series of interest rate, the standard deviation 1.44 which is much smaller than the mean. The cash rate was at the highest level of 7.50 percent at the beginning of sample period that is in 1995. The expansionary monetary policy since then pushed the cash rate to the lowest level to 2.00 in 2015.

Net export
Mean	-62.16
Standard Error	58.55
Median	-13.13
Mode	#N/A
Standard Deviation	268.29
Sample Variance	71981.13
Kurtosis	18.73
Skewness	-4.20
Range	1401.06
Minimum	-1204.18
Maximum	196.88
Sum	-1305.37
Count	21

The average net export growth in Australia is negative indicating a decline in trade balance of the economy.

AUD/USD
Mean	1.10
Standard Error	0.01
Median	1.13
Mode	1.14
Standard Deviation	0.13
Sample Variance	0.02
Kurtosis	0.85
Skewness	-1.05
Range	0.63
Minimum	0.70
Maximum	1.34
Sum	277.53
Count	252

From the series of monthly exchange rate, the average exchange rate is 1.10. This implies on an average Australia exchanged 1.10 AUD against 1 USD. The lower standard deviation value of 0.13 implies the exchange rate remains relatively stable. The AUD/USD exchange rate is as high as 1.34 and as low as 0.70.

Real GDP growth rate
Mean	2.46
Standard Error	0.38
Median	2.67
Mode	#N/A
Standard Deviation	1.73
Sample Variance	3.00
Kurtosis	3.14
Skewness	-1.40
Range	7.46
Minimum	-2.78
Maximum	4.69
Sum	51.57
Count	21

Summary Statistics of USA

The descriptive statistics for real GDP growth shows that average growth for USA economy from 1995 to 2015 is 2.46. The obtained standard deviation for series of real GDP growth is 1.73. As standard deviation smaller relative to average growth rate, there is a stability in economic growth of USA (Lindenberger, et al., 2017) In the selected time range, USA attained an all-time high growth rate of 4.69 percent in 1999. The lowest economic growth rate of -2.78 occurred immediate after the year of global financial crisis.

inflation rate
Mean	2.27
Standard Error	0.23
Median	2.34
Mode	#N/A
Standard Deviation	1.05
Sample Variance	1.11
Kurtosis	0.93
Skewness	-0.96
Range	4.19
Minimum	-0.36
Maximum	3.84
Sum	47.58
Count	21

The average inflation rate of 2.27 percent implies that price level in the economy grew at an average rate of 2.27 percent. The average inflation rate in USA is close to that in Australia. Stability in the price level can be predicted from a relatively lower standard deviation for inflation rate in the selected sample period. The estimated standard deviation is 1.05. The inflation rate in the economy varies between a maximum of 3.84 percent and a minimum of -0.36 percent.

unemployment rate
Mean	5.98
Standard Error	0.37
Median	5.50
Mode	5.80
Standard Deviation	1.69
Sample Variance	2.85
Kurtosis	0.06
Skewness	1.09
Range	5.60
Minimum	4.00
Maximum	9.60
Sum	125.50
Count	21

Summary statistics of unemployment series in United State reveals that rate of unemployment in USA on an average was 5.98 percent. This is lower than the average unemployment rate of 6.10 percent in Australia. The standard deviation for unemployment is 1.69. this implies lower variability in the measured unemployment that is in most of years’ unemployment rate remain closer to that of the average unemployment rate. Unemployment rate in the economy varies between the range of 9.60 and 4.00 percent.

Interest rate
Mean	2.72
Standard Error	0.52
Median	1.93
Mode	#N/A
Standard Deviation	2.38
Sample Variance	5.66
Kurtosis	-1.82
Skewness	0.14
Range	6.15
Minimum	0.09
Maximum	6.24
Sum	57.22
Count	21

The Federal Reserve in USA determines the fund rate in the economy. The fund rate for USA economy is on average remained at 2.72. In order to maintain a stability in the economy the Fed prefers to keep the cash to a relatively stable state. For the series of interest rate, the standard deviation 2.38 which is much smaller than the mean. The highest and lowest fund rate is obtained as 6.24 percent and 0.09 percent respectively.

Net export
Mean	9.60
Standard Error	4.81
Median	6.47
Mode	#N/A
Standard Deviation	22.03
Sample Variance	485.37
Kurtosis	2.88
Skewness	1.10
Range	102.95
Minimum	-28.23
Maximum	74.72
Sum	201.55
Count	21

The mean growth rate for net export is 9.60 percent. The trade balance however is largely variable for USA as implied by the large value of standard deviation for net export series.

USD/AUD
Mean	0.92
Standard Error	0.01
Median	0.89
Mode	0.87
Standard Deviation	0.13
Sample Variance	0.02
Kurtosis	3.23
Skewness	1.77
Range	0.68
Minimum	0.75
Maximum	1.43
Sum	232.72
Count	252

From the series of monthly exchange rate, the average exchange rate is 0.92. This implies on an average USA exchanged 0.92 USD against 1 AUD. The lower standard deviation value of 0.13 implies the exchange rate remains relatively stable. The exchange rate between USA and Australia varied in the range between 1.43 and 0.75.

Comparison of Macroeconomic Performance of Australia and USA

Figure 1: Trend in real GDP growth and inflation

(Data.worldbank.org, 2018)

Figure 2: Trend in real GDP growth and unemployment

(Data.worldbank.org, 2018)

Figure 3: Trend in real GDP growth and real interest rate

(rba.gov.au, 2018)

Figure 4: Trend in real GDP growth and exchange rate

(rba.gov.au, 2018)

Figure 5: Trend in net export growth and exchange rate

(Data.worldbank.org, 2018)

Figure 6: Trend in real GDP growth and inflation

(Data.worldbank.org, 2018)

Figure 7: Trend in real GDP growth and unemployment

(Data.worldbank.org, 2018)

Figure 8: Trend in real GDP growth and real interest rate

(fred.stlouisfed.org, 2018)

Figure 9: Trend in real GDP growth and exchange rate

(Data.worldbank.org, 2018)

Figure 10: Trend in net export growth and exchange rate

(Data.worldbank.org, 2018)

Steady economic performance of a nation is subject to suitable design of government policies to achieve certain macroeconomic goals. Government aims to attain long term stable growth along with a stable price level and unemployment (Johnson, 2017) Government uses fiscal policy or monetary policy or a combination of both to accomplish certain objectives.

The macroeconomic policy of Australia consists of fiscal, monetary and exchange rate policy. The fiscal policy is a direct macroeconomic policy tool controlled by the government. The fiscal policy works through the combination of government expenditure, various types of taxes and government borrowing (Castelnuovo, Lim and Robinson, 2016). Government uses automatic stabilizers to control economic activity of the nation. This refers to certain type of revenues and spending associated with varying levels of economic activity. These are designed in such a way that it affects the aggregate demand without direct intervention of government. During recession this automatically leads to expansionary policy while in times of high inflation this results in tightening policy. The fiscal policy is conducted under the Charter of Budget Honesty Act 1998 (Aph.gov.au, 2018). The fiscal support and mitigation of economic risk through resilience packages help Australia to maintain a steady economic growth along with low unemployment.

The target of monetary policy is to sustain a stability in price level. One instrument of monetary policy is the adjustment through cash rate. RBA sets and adjust cash rate depending on the economic condition. If there is a growing demand side pressure resulting in a gradual rise in price level, then RBA tightens the monetary policy by increasing the cash rate (Bahmani?Oskooee and Nayeri, 2018) This dampens the demand pressure. In the phase of weak demand, RBA lowers the cash rate for necessary economic expansion. The inflation target of RBA ranges between 2 to 3 percent. By maintain a stable and low inflation RBA attempts to achieve a stable economic growth.

Conclusion

The exchange rate policy of Australia targets to maintain a stability in the value of domestic currency. Currently, Australia has floating exchange rate system where market forces automatically adjust exchange rate. A depreciation of currency increases export competitiveness while an appreciation of currency reduces export competitiveness.

The government in USA designs policies to maintain in stability in economic activity. The objective is to achieve a high growth along with high level of inflation and low and stable inflation. Government uses fiscal policy or monetary policy or a combination of both to attain these objectives.

The active fiscal policy in USA has been observed since the great depression occurred in 1930.  Since then fiscal policy has been gradually evolved through a series of changes. There is a major change in fiscal policy measures since 1990s. Fiscal policy now targets to improve the economy only at the margin. Instead of directly increasing government spending, the policy focus of government is make economic expansion by cutting rate of capital gain tax (Antonakakis, Andre and Gupta, 2016) This is expected to increase incentive to make investment in assets or accumulating wealth. The lower unemployment in USA is attributed from government investment in various education and skill development program

With passes of time and change in economic composition, policy focus of the government shifted towards monetary policy. The economic condition in 1970s, 1980s and 1990s reveals the difficulty of using fiscal policy to attain a target of a stable price level (Reifschneider, Wascher and Wilcox, 2015) While the problem of unemployment can be best addressed through fiscal policy, it is best to use monetary policy to stabilize the price level overtime.  

Analysis of economic performance over the past few years reveals that the economy of Australia attained a stable economic growth long with stable price level and high employment. This helps to make a positive projection for upcoming years. The economic performance of Australia is not only influenced by domestic economic activity but also by global economic condition. Global economy is growing at a faster pace. The steady growth of major trading partners likely to have a positive spillover effect on Australian economy. Despite slowdown in mining activity, the economy has still maintained a stable growth. Investment are taking place in sectors other than mining and construction. Growth of service sector and export growth will remain the driving force for the economy (Cross and Poon, 2016).  The accumulating housing debt, slow growth in wage and focus towards tight monetary policy might cause some obstacles to economic growth. However, strong resilience of the economy implies the economy will remain at the steady pace of economic growth mitigating the risk of future recession.

References

Conclusion 

The paper analyzes economic performance of Australia and USA for the past twenty-one years. Despite being a large in size, economic growth in USA is lower relative to Australia. The economic boom in Australia resulted from growth of mining and service industry leads to a rapid economic growth in Australia. In terms of unemployment, rate of unemployment in USA is relatively lower than that of Australia. The average inflation rate in USA and Australia are closer to each other. Government of both nations adapt expansionary monetary policy to maintain a stable growth and inflation. The trade deficit in USA is larger relative to that of Australia. Active fiscal and monetary policy have a crucial role in achieving a steady economic performance. In addition to monetary and fiscal policy, exchange rate policy is used in Australia to stabilize domestic currency relative to its trading partners.

Reference list 

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Aph.gov.au, 2018. The Tools Of Macroeconomic Policy—A Short Primer – Parliament Of Australia. [online] Aph.gov.au. Available at: <https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/BriefingBook44p/MacroeconomicPolicy> [Accessed 18 January 2019].

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