Macroeconomic Variables And Their Interplay In Shaping Up The Australian Economy

Macro-economic Indicators of Australia

The continent of Australia stretches to a distance of around 7.687 million square km. According to live population statistics, the continent is populated by more than 24,608,584 people. The main focus of this assignment is to understand the macroeconomic variables and their interplay in shaping up the Australian economy. In our study the macroeconomic indicators that have been considered are as real GDP, unemployment rate, interest rate, CPI, inflation rate and few other variables. The data used in this assignment has been collected from the online data bank of World Bank. The time-period for which data have been collected ranges from 2008 to 2016. Prior to moving into the collection and analysis of the data, these economic indicators have been described below along with the graph of the same over the time-period 2008-2016:

Real GDP: The value of goods and services produced in an economy within a particular year and adjusted for change in price that is adjusted with the current inflation or deflation rate is termed as real GDP.

 

Figure 1: Real GDP (2008-2016)

Source: World Bank Online Data

Interest Rate: The proportion of loan that the borrower has to pay to the lender as the repayment of his debt is known as interest rate. In other words, the rate at which any bank provides loans to the consumer is known as interest rate.

 

Figure 2: Real Interest Rate

Source: World Bank Online Data

Unemployment Rate: The people in the labour force who are interested to work but not getting any jobs are termed as unemployed. Unemployment rate is the percentage of the total labour force not getting their jobs even after job search.

 

Figure 3: Unemployment Rate (2008-2016)

Source: World Bank Online Data

CPI: Every nation has a pre-determined basket of goods and services that are required by the people dwelling in that nation on a regular basis. The weighted average of the prices of this pre-fixed basket is measured and this measurement is termed as consumer price index.  

 

Figure 4: CPI (2008-2016, Base Year 2010 = 100)

Source: World Bank Online Data

Inflation rate: The continuous trend in the market whereby the price of the general goods rises by a particular percentage is called the inflation rate.

Exchange rate: The evaluation of domestic currency in terms of the currency of some foreign economy is termed as exchange rate.

 

Figure 5: Exchange Rate (2008-2016)

Real GDP

Source: World Bank Online Data

Export: Export is the value of total goods and services produced within any nation and traded to some other nation to meet their demand.

 

Figure 6: Export (as % of GDP)

Source: World Bank Online Data

Import: The value of total goods and services that any particular nation uses by purchasing from foreign nation is known as imports.

 

Figure 7: Import (as % of GDP)

Source: World Bank Online Data

The data obtained from the World-Bank website has been tabulated below:

 

Table 1: Macroeconomic Indicators of Australia (2008-2016)

Source: Collected and Tabulated| World Bank Online Data Library

Figure 8: Pair-wise graph of Real GDP and Interest Rate

Source: Created by the Author

The above figure shows that there has been steep fluctuation in the interest rate within the Australian economy. In the year 2009 and 2011, the interest rate fell sharply below 2% whereas the real GDP shows consistent increase during the same phase. Usually an increase in the interest rate implies, people are consuming lesser goods and services and saving. Hence as a result the GDP is expected to decline. In other words, the usual notion of economic theory highlights the inverse relation between real GDP and interest rate within any economy. Through the above figure one anomaly to this theory has been observed. In the year 2013, the real GDP was highest within the chosen span of time period. On other hand, the interest rate was also highest in that year.  However this might have happened cause in this assignment only Australia has been chosen as a country. This is because given the existing complexity of the global economy, the actual effect of real interest rate on GDP and thereby economic growth is very less.

 

Figure 9: Pair-wise graph of Real GDP and Unemployment Rate

Source: Created by the Author

There exists strong theory between the unemployment rate and GDP of any nation. The celebrated theory of Okun’s Law highlights the existing inverse relation between the unemployment level and GDP of an economy. According to this law, GDP declines by 2% whenever there is increase in the level of unemployment by 1%. For Australia it is seen that whenever the level of unemployment increased the level of real GDP fell and vice versa. However by the end of 2016, the level of unemployment is quite high up to 5.73% which is certainly a concerned issue for any economy.  

Interest Rate

 

Figure 10: Pair-wise graph of Real GDP and Inflation Rate

Source: Created by the Author

The three macro-economic variables namely unemployment, GDP and inflation rate are the pillars of any economy. Distortion in any one of this indicator can severely blow down the economic stability of any country. Inflation and GDP shares a peculiar relation amongst themselves. Inflation due to government’s expansionary monetary policy within an economy by small amount can enhance the overall demand within the economy and thereby increase the GDP of the nation. On other hand, if there is a constant sharp increase in the GDP in any economy, then it is going to increase the level of inflation and thereby negatively influence the country. Hence according to the views of global economists GDP growth by 2.5 to 3.5% is the desired level for the prosperity of the nation.

 

Figure 11: Pair-wise graph of Real GDP and Exchange Rate

Source: Created by the Author

There is no such economic theory that can explain a relation between the exchange rate of any country and the GDP of the same. However, logical thinking can lead one to establish some relation between these two variables. It is the GDP that has more influence on the exchange rate of any nation than otherwise. It can be stated that as exchange rate weakens, it enhances the trade and thereby increases the GDP indirectly. In the figure above it can be seen that as exchange rate declines, the GDP of Australia increases. During this time-period when the exchange rate was lowest, real GDP of Australia had its highest value. 

 

Figure 12: Pair-wise graph of Real GDP and Net Exports

Source: Created by the Author

The figure above clearly highlights that the Australian economy on an average always have negative net export. In other word, the country has always been importing more than it has been exporting. In our chosen time frame during 2009 and in 2011, the Australian economy had positive value of net export. Other than this the net export has always been negative and perhaps this is one of the reasons for the slow progress of the Australian economy in terms of its GDP and economic performance.

The economy passes through business cycle with four identified stages namely recession, recovery of expansion, boom and downturn. The Australian economy has not faced recession over the last 25 years. This is clearly a sign of good governance by the existing government. The government of Australia has been able to strategically curb the impact of global recession and save the nation from facing any consequences of the same. On other hand, studying the available data on different macro-economic indicators of Australia, it can be stated that the country has been experiencing slow growth rate over the last decade. The table shows that during 2008, the absolute value of real GDP in Australia was 1.05 trillion AUD. After around 7 years, data of 2015 suggests that real GDP of Australia is 1.339 AUD. These two figures is enough to prove the sloth movement of the economy. On other hand, the level of unemployment within the economy continues to exist on the higher note. This clearly suggests that though the government has been able to save the economy from negative impact of global recession, the government has not been able to successfully implement monetary of fiscal policy to push up the economy in its growth path. Investment is to be blamed as one of the primary reason for the drawback of the economy. There has been low level of investment in business and along with it persistent level of unemployment. This has direct impact on the economy’s demand for goods and service. Study also shows that the economy has been facing a decline in its level of aggregate demand. Obviously when demand is low, the production of the following period is going to be reduced and in turn more people is going to be jobless or have to work under deprivation with low wage. Data from Australian Bureau of Statistics shows that building approval fell by 20% which indicates a sharp decline in consumer demand.

Unemployment Rate

There are several reasons which have helped the nation to be doing well till date even after showing a slow growth rate. Australia is engaged in exporting their valuable natural resources like gold, uranium, coal and iron ore. In the global economy, Australia never faced dearth of demand for their plethora of god gifted natural resources and they had successfully used it. In addition, the government of Australia realised that they have the potentiality to cater the global economy with their stock of natural resources and also engaged themselves in the R&D of the same. They have devoted their investment in finding out different mineral ores and strategically extracting them and minimizing the risk of overuse. The country even succeeds in their business by supplying huge volume of wools and woollen products to China and other European markets.

In spite of the fact that there was no severe direct impact of the sub-prime crisis on the Australian economy there had been indirect consequences of the same. Since, the global economy faced a turmoil, the demand of Australian natural resources declined and as a result it impacted the nation’s trade balance. As a result the growth within the economy slowed down as already seen by the volume of GDP. Economists are of the view that the economy is not recession proof and the high unemployment level itself indicates the emergence of a recession in the global economy. There has been a sharp decline by 2.5% in the demand of goods and services by the domestics of Western Australia. Investment is only done by government and there has been a collapse of the same by the private sector. Professor Jeff Borland, Melbourne University states that the recession might come in Australia through the decline in demand for Australian goods.

Hence the assignment can be wrapped up by stating that the nation is expected to face recession soon as a consequence and ripple effect of global slowdown and not as a result of direct economic slowdown. It is advisable that the nation and its government starts preparing themselves for the same. The primary focus of the government should be to bring in private investment along with new industry within the country. This would provide a scope for employment and thereby generate internal consumption demand and in turn lead to growth of the economy.

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