Discussion
In this economic analysis, the country that has been selected is Australia. The Australian economy is the 13th largest economy experiencing an uninterrupted and high economic growth for the past 26 years. It was the only country among the OECD countries that had not faced a recession during the financial crisis. (Schneider, 2013) Business and government spending drive the economy and the growth is wages is low. According to International Monetary Fund data (2017), the inflation rate in Australia had been well contained around 1.9% in 2017 while wages grew by 2.1%. The current unemployment rate is low at 5.6% and is expected to fall according to the Australian Bureau of Statistics (2017). However, there is also a lot of underemployment in the economy. The country also has very low public debt along with a stable and strong financial system. Recent data shows that there has been a drop in the export prices on a global scale, which is posing as constraints to growth. This paper analyses the economic indicators of the country and checks its economic performance over the period 2004-2014. These indicators include the real per capita GDP, the real GDP. The real GDP growth rate, inflation rate and the unemployment rate with the service sector playing an important role in employing 70% of the workforce. (Schneider, 2013). These indicators are chosen because it reflects the country’s price level, output and labour market analysis. The analysis is conducted time series graphs of these selected indicators.
Real gross domestic product or real GDP is a measure of the final value of the goods and services than an economy produces within its geographical border in a given year. This measure is inflation-adjusted and is expressed in terms of a base year, which allows it to account for changes in the price level and thus provide a more accurate reflection of the economic growth of the country. Governments to analyze the purchasing power of the economy along with growth often use this measure. The time series graph shows that the real GDP has been increasing over the last decade in Australia. Even during the financial crisis in 2008, the economy did not face a fall in its output. The terms of trade had improved for Australia since the 2000s and this lead to a continuous rise in real GDP mostly above the forecasted level. However, in 2012 mining investments declined as a response to low commodity prices, which was reflected by the fall in the real GDP but non-mining investment caught up and with that, GDP started rising again. (Steven, 2016). The government supported this by lowering the interest rates along with depreciation of exchange rates.
Analysis of the Labour Market
FIGURE 1: Real GDP (2005-2014)
Data source: World Bank Data Bank, Source: Created by the author
Growth rate of the gross domestic product is the rate at which the market value of all the goods and services produced by a country in a given time period and adjusted to inflation, changes or grows every year. The real GDP growth rate is inflation adjusted and it takes into account the purchasing power and therefore used as a measure of economics growth. The Australian economy has been experiencing a very steady growth in comparison to the other OECD countries and has, over the years been higher that the rate forecasted. (“NSW Department of Industry”, 2018) The growth rate did fall during the financial crisis but the fall was not detrimental as the economy was very quick to recover. This fall was due to the hit the international market faced due to the crisis. Growth rate in real GDP fell again after mid-2012 when the commodity prices fell but it eventually recovered and has been rising since 2014. The government was quick to react and the mining boom aided the recovery. Moreover, a huge part of the exports goes to China and all this has helped the country in staying recession free.
FIGURE 2: Real GDP Growth Rate (2005-2014)
Data source: OECD Data, Source: Created by the author
Real per capita GDP is the real GDP or the total final output of an economy divided by the population of the economy and adjusted by inflation. This measure helps in comparing the standard of living in a given country with other countries. It helps in measuring economic indicators in keeping in mind the population of different countries. The graph shows that over the past decade, the real per capita GDP has been rising in Australia with a slight drop after the 2008 crisis but it was quick to recover. (“Reserve Bank of Australia Annual Report – 2017 | RBA”, 2018)
FIGURE 3: Real Per Capita GDP (2005-2014)
Data source: OECD Data, Source: Created by the author
Therefore, to sum up, the country has performed very well over the last decade and this has been aided by prompt action from the government through various fiscal measures like interest rate adjustment and bringing changes in the exchange rate. (Boons, et. al., 2013) It can also be seen that that the country has performed remarkably well despite the financial crisis of 2008 and the impact on the economy was mainly due to its international relations as the country is highly dependent on its foreign trade.
According to the definition provided by the International Labour Organization, an individual can be called unemployed only if he or she has not been employed nor self-employed somewhere which would be paying him or her for a reference period but was ready to work against payment during that reference period. (McCallum, et al., 2015) The person also should have been taking various measures during that period to be employed at some place that would pay them. Unemployment is a vital indicator as it affects the economic development of a country and therefore combating it is one of the primary goals of economies.
There are different types of unemployment and each have been discussed below:
- Frictional Unemployment: This occurs in the period of job transition where people are regarded as unemployed as they attempt to find a new job. Some amount of frictional unemployment always exists due to the presence of economic frictions due to the ever changing demands of the employers and consumers. The time taken by the employees to adapt and learn the new techniques and skill set is what causes this kind of unemployment.
- Cyclical Unemployment:This occurs due to the economic cycles. During recessions, the demand for goods and services fall and employers lay off workers, which increases labour supply over demand. This was experienced in the 1930s and in the 1980s depression and is also called the demand-deficient unemployment.
- Structural Unemployment: When the skill set, education or experience gained by workers do not match the requirement of the jobs offered, usually occurs when there is a change in the structure of the economy, structural unemployment occurs which is a lot like frictional unemployment and encourages voluntary unemployment and results when an industry declines due to change in demand. However, it lasts longer than a frictional unemployment.
In Australia, the unemployment rate has declined over the years. The Australian government adopted stable macroeconomic policies to combat unemployment. The National Competition Policy has also aided in this reduction along with several microeconomic foundations. Moreover, provision of flexible employment arrangements and incentivizing employers for hiring workers and boosting outputs along with reducing costs like employment transaction costs help in reducing unemployment. Enhancement of new skills by education and training provisions and also allowing for labour mobility have also helped the Australian government to reduce structural unemployment. Welfare policies, which aim at improving the health and well-being of the employees so as to increase their productivity and income support systems, which help able workers to find paid employment adopted by the government has also contributed in the increase in employment. However, the economy has high levels of underemployment and disguised employment in many sectors. The unemployment rate was high during the period of low GDP growth but over the years, the unemployment rate reduced. With the occurrence of the financial crisis, the rate of unemployment saw an increase but with time, the unemployment rate fell. However, when the commodity prices increased, there was a fall in the growth rate and therefore a rise in unemployment as the commodity prices rose. (Wilkins, & Wooden, 2014).
FIGURE 4: Unemployment (2005-2014)
Data source: World Bank Data Bank, Source: Created by the author
The most common types of unemployment that Australia faces are frictional unemployment, cyclical unemployment and disguised unemployment. Frictional unemployment is one that exists in every economy as it occurs due to frictions in the economy. The country aims to come to a point of full employment and in that quest; there exists high levels of disguised unemployment in different fields. According to the Australian Bureau of Statistics, the country faces high levels of underemployment. Australia has taken up very good macroeconomic policies, which have been able to successfully manage the unemployment rates and keep them low even when recessions struck the world economy.
The price level changes can be analyzed by analyzing the rate of inflation in the country. Inflation is a rise in the general price level of all the goods and services of the overall economy. Inflation can be measured in several ways. The method used in this paper is by the GDP deflator or the gross domestic product deflator as it is a broad index for measuring inflation for an economy. The other methods are by using the CPI indicator or consumer price index indicator and the personal consumption expenditure chain price index or the PCE price index. (Gali, 2015)
There are two types of inflation identified by the cause behind it.
- Demand-pull Inflation: This occurs when the rate of increase in the aggregate demand in an economy is greater than the economy’s productive capacity. These are looked upon as shocks to demand which leads to an immediate rise in the money supply from the central bank which in turn leads to greater increase in the demand but supply in the short run remains constant resulting in inflation which is basically increase in the price level.
- Cost-push Inflation: This occurs due to rise in the prices of raw materials and wages. These price rises leads to a rise in the cost of production and thus a decrease in the aggregate supply. This in turn would increase the overall price level
FIGURE 5: Inflation (2005-2014)
Data source: World Bank Data Bank, Source: Created by the author
The inflation rate in Australia has been stable over the years with a sharp decline after the crisis but it eventually recovered. Some amount of inflation is required for the proper functioning of the economy, which is why the government took measures to bring up the price level like setting an inflation target to 2-3%. This target is maintained by using the cash rate also interest rate changes have an impact on inflation and can be used but it comes with longer lags as individuals take time to adjust. The rate of inflation reached its peak in 2011-2012 when the country was facing good terms of trade, which was leading to a rise in the commodity prices hence the high inflation rate. (Gregory and Smith, 2016). The Australian government was quick to devise policies, which could bring down the inflation rate or in other words the price level.
Conclusion
To conclude it can be seen that the Australian economy has performed remarkably well and most of the credit can be given to the mining and related industries. It was also quick to adapt to the rise in the commodity prices and shift to non-mining activities. The unemployment level has been low and inflation has been steady over the years. The country performed well even with the financial crisis of 2008. The risks it faces is its dependence on international trade mainly on china and the aggressive government policies to reduce interest rates. If any future shocks are to arise by looking at the countries performance it can be said that its strong and efficient fiscal and monetary policies will enable it to adapt quickly. The economy is expected to continue a recession free record of accomplishment until 2021 given the fact that its real GDP has been expanding over 2.5%. the employment data however shows that with the increasing underemployment and low job growth there are chances of a slow labour market. Inflation has remained steady and is expected to stay subdued until 2021. Given all the economic indicators, the future of the Australian economy seems to be flourishing in the recent future.
References
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