Factors Affecting Net Exports In Australia: Correlation And Regression Analysis

Correlation and Regression analysis Results

A country’s trade balance is determined by the total exports and imports. When a country exports more than it imports, it earns higher than it spends hence a positive balance of trade and vice versa (Connolly, 2013). This has however not been the case with Australia where the country has experienced negative net exports since 1990. Its major exports: petroleum products, coal Briquettes, Wheat, gold, natural gas, personal travel services, education related services, and beef products, are fewer when compared to the major imports, machinery, mineral fuels, vehicles and electrical machinery equipment (Hall, 2018). This is attributed to the changes in the rate of exchange, changes in the market demand and supply, emergence of new economies that produce, Australian tax rate and the level of income in the Australian economy (Open Textbooks for Hong Kong, 2016). To increase the export for healthy international trade, the country must create duty drawbacks schemes, simplify regulations, increase credit availability, improve cooperation among economic actors and combine long term and short term export growth policies (Infoplease, 2018). Moreover, the country needs to benchmark from highly exporting countries such as China and Japan to locate better strategies.

This research sought to establish if real GDP, exchange rates, and interest rates affected the level of net export in Australia. Correlation and regression analysis were conducted in Excel to establish the relation between the variables. Generally, the results found out that real GDP, exchange rates, and rates of interest had significant impacts on the net export. An increase in the real GDP was found to reduce net export same as exchange rates. Interest rates were however found to have strong positive correlation with net exports.

Correlation between net exports and real GDP, exchange rates and interest rates

Testing for the existence of an association between the mentioned variables was conducted using a correlation test.

Table 1. Correlation coefficient 

From the table, net export has a strong but negative correlation (-0.798) with real GDP. In the same way, exchange rates have displayed a negative but weak correlation (-0.326) with net exports. Finally, interest rates displayed a strong positive correlation with net export.

Scatter plots were then drawn to graphically display the relationships as shown below.

Fig 1. Scatter plot for the relationship between net export values and real GDP

Fig 2. Scatter plot for the relationship between net export values and exchange rates

Australia’s Net exports Determinants

Fig 3. Scatter plot displaying the relationship between net export values and interest rates

A regression analysis was further conducted to give the general model on how net export is affected by real GDP, interest rates, and exchange rates.

Table 2. Regression Coefficient table

The regression output suggests that we can predict what the net export would be, with 64.4% confidence (R square), an expression that the model explains 64.4% of the variable variation. The resultant formula is,

From the regression results, a unit increase in the real GDP causes a decrease in the net export by 0.004445. Moreover, a unit increase in rates of interest results in a decrease in the net export by 60.75111. However, an increase in exchange rates causes a 902.55 increase in the rate of.

Australian net exports refer to the difference in the value of total exports and imports by the country. Negative net exports imply that a country imports more goods than it exports and vice-versa. In Australia therefore, there are fewer exports compared to imports hence the negative values making the country to experience a negative balance of trade (Infoplease, 2018). The value of net export of a country is generally affected by the country’s rate of inflation, the rate of exchange of a given country, the country’s productivity, the quality of goods produced by a country, marketing, domestic GDP, foreign GDP and trade restrictions (Chand, 2017).

Alongside domestic impacts, there are also realized international implications caused by monetary policies. Fluctuation in the rates of interest influence the demand and supply of commodities. As a result, interest changes affect imports and exports as well as the overall demand for imported goods and services (Jakab, et al., 2019). This implies that a foreign country’s monetary policy can impact other countries. In other words, the United States is not independent of European, Asian, or Australian monetary policies (Erceg, et al., 2018).  It is imperative to note that the central bank’s ability to influence the real rates of interest is key in monetary element transmission. Real interest rate changes result in changes in purchasing habits on durable goods. Moreover, cutting interest rates will cause a decrease in the demand for the domestic currency to invest in the country’s asset market (lumen, 2020). The foreign currency price for that country’s currency will reduce. The end result will be reduced price of the produced goods leading to an increase in exports and a decrease in the total imports impacting the value of net export (Hall, 2018).

Suggested Strategies to Improve Australia’s Net Exports

The level of income in other countries has an impact on the net export of a country. When a government sets the lower wage bill higher, there will be much money in circulation for that particular country. Equally, when there is a general rise in the income for workers in a particular country, much money will be flowing in the economy (Open Textbooks for Hong Kong, 2016). An increase in the money circulating increases the consumption level. The demand for both domestic and foreign products will increase thus increasing the export level for other countries. Equally, a high level of money flowing translates to a high level of innovation and businesses hence, greater levels of production. The country will thus export more products making an impact on the net export (tutor2u, 2020). Australia can benefit from this by taking into consideration countries with higher incomes for business deals.

The price level of goods and services within a given country is too, a determinant of the level of imports and exports. For instance, when the USA export highly-priced products, there will be reduced demand for their export causing a fall in the total quantity exported. On the other hand, high prices of Australia goods and services will automatically make people to opt for cheaper foreign products lading to an increase in the quantity exported. This is, however, the opposite with lower prices of domestic goods as exports will increase (Artus, 2011).

Additionally, a country’s monetary trade policies such as tariffs and taxes significantly influence the level of net export for that nation. When a country reduces taxes on produced goods, many firms will manufacture leading to a surplus that’s exported. Likewise, when a country reduces charges on transport for export goods, there is realized an increased production. Trade policies for other countries also influence the quantity exported. For instance, the tariffs imposed by the US government on Chinese products led to a decrease in the number of goods imported by China to the United States (Saylor Academy, 2012). As well, reduced tariffs by a country cause a significant increase in the number of goods imported. Subsidizing production of given products by foreign nations makes it easier to import the good thereby increasing a country’s import (Yeo, 2019). Australia should, therefore, consider improving its internal production by subsidizing costs of production, promoting more innovation, reducing transport services for export goods in order to export more products.

A country experiencing high levels of inflation causes a shift in demand for goods and services from domestic to foreign. This causes an increase in the number of goods imported. Besides, foreign markets will not be favorable for the exported goods due to their high prices. Nevertheless, reducing inflation increases the demand for a country’s, lets Australia, products both domestically and internationally (Riley, 2008). Equally, a rise in the levels of domestic GDP increases the level of income resulting in more imported goods being bought. Industries will purchase raw materials from abroad while citizens will opt from high-quality products from other countries. Domestic firms will produce many products hence the positive net export will be realized. Like domestic GDP, an increase in foreign GDP will increase foreign spending hence more exports (Majaski, 2019).  

Conclusion

The negative average for the net export of Australia is not favorable for its international trade. The country should, therefore, consider several recommended monetary factors such as subsidy on domestic production, reduction in rates of interests, and promotion of innovation to increase their exports. The government should also consider relationships with foreign countries, the quality of goods produced, the level of competition in the market, the level of technology, and the emergency tack measures. Finally, the government should invest much in market research and come up with generally-trade-friendly policies. I recommend for further study on how real GDP can be controlled to improve net export.

References

Artus, J. R. & Sosa, S. C., 2011. Relative Price Effects on Export Performance: The Case of Nonelectrical Machinery (Incidence du prix relatif sur les exportations: le matériel non électrique) (Efectos de los precios relativos en el comportamiento de las exportaciones: El caso de la maqui. 25(1), pp. 25-47.

Atkin, T. & Connolly, E., 2013. Australian Exports: Global Demand and the High Exchange Rate. Reserve Bank of Australia.

Chand, S., 2017. 8 Factors Influencing the Value of a Country’s Exports and Imports.

Erceg, C., Prestipino, A. & Raffo, A., 2018. The Macroeconomic Effects of Trade Policy. International Finance Discussion, Volume 1242.

Hall, M., 2018. Influence a Country’s Balance of Trade?. Investopedia, 22 June.

Infoplease, 2018. Imports and Exports. GDP and the Players Three: Imports and Exports.

Jakab, Z. M., Várpalotai, V. & Vonnák, B., 2019. How does monetary policy affect aggregate demand? A multimodel approach for Hungary.

lumen, 2020. Impacts of federal reserve policies. Boundless Economics.

Majaski, C., 2019. Net Exports. 4 October.

Open Textbooks for Hong Kong, 2016. Determinants of Net Exports. Principles of Economics, 25 April.

Riley, G., 2008. Revision Focus: Export Performance. Economics.

Saylor Academy, 2012. International Trade: Theory and Policy.

tutor2u, 2020. Monetary Policy – Exchange Rates. Explore Economics.

Yeo, A. D. & Deng, A., 2019. The trade policy effect in international trade: a case of Pakistan. Journal of Economic Structure, 8(43).

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