Impact Of Oil Prices, Inflation, And Interest Rates On Economic Growth: A Comparative Study Of Australia And The United States

Analysis of Economic Growth in Australia and the United States

The two countries chosen for the assignment are Australia and the United States of America, both being two predominant economies of the world.

Both the USA and Australia being net importer of oils, the reduction in the global oil prices are expected to have positive implications for the country. However, the decrease in the same does effect the domestic producers adversely as they face a reduction in profits.

The devaluation of the domestic currencies helps both the concerned countries to increase their exports while their imports become more costly. Increase in the currency value, however, has the opposite effects.

High inflation in the country becomes hurting for the households. However, a controlled increase in the inflation helps in increasing employment. Very low inflation on the other hand implies that the productivities and aggregate demand are low.

Low interest rates facilitate investments and production in a country whereas high interest rates encourages savings and therefore, this monetary tool is used according to the need of economic growth of the country.

High industrial production in a country increases productivity as well as employment, thereby leading to economic growth in a country.

Figure 1: Oil prices (2005-2017)

(Source: Opec.org, 2017)

As can be seen from the above figure, the oil prices, which started increasing significantly in 2011 till 2014, reduced significantly in 2015 and continues to remain low.

Figure 2: GDP of Australia

(Source: Abs.gov.au, 2017)

The GDP of the country kept on increasing consistently till 2013 before declining a little in the current period.

Figure 3: Australia Industrial Production

(Source: Abs.gov.au, 2017)

Much of the dynamic in the growth of the economy can be attributed to the industrial production over the years.

Figure 4: Inflation rate in Australia

(Source: Abs.gov.au, 2017)

The inflation rate of the country has decreased in the last few years, which is expected to reduce the aggregate demand in the economy, as is reflected in the recent fall in the economy’s GDP (Dyster & Meredith, 2012).

Figure 5: Exchange rate in Australia

(Source: Abs.gov.au, 2017)

The country has significantly reduced its domestic currency value, to facilitate the growth in the economy as can be seen by the increase in GDP in 2015.

Figure 5: Interest rate in Australia

(Source: Abs.gov.au, 2017)

The country has significantly decreased its interest rate from 2009, to increase investment and productivity, which had positive implications on the country till 2013 as the GDP increased consistently.

Impact of Oil Prices on Industrial Production and GDP

Figure 6: Comparison of all the indicators of Australia (2005-2017)

(Source: As created by the author with the help of data provided above)

Figure 7: GDP of the USA

(Source: Usa.gov, 2017)

The GDP of the country has continually increased from 2005 to 2017 and the reduction in the oil prices can be considered as one of the contributing factors to the same (Bergsten & Gagnon, 2012).

Figure 8: Inflation Rate in the USA

(Source: Usa.gov, 2017)

The fluctuations in the inflation rate of the country have significantly reduced in the recent periods and remains more or less within 0% to 2%.

Figure 9: USA interest rate

(Source: Usa.gov, 2017)

The country, from 2009, has consistently maintained a low rate of interest to facilitate borrowings and investment, thereby increasing the aggregate demand, which is shown in the continually increasing GDP.

Figure 10: US Dollar value (2005-2017)

(Source: Usa.gov, 2017)

The currency value of the country showed substantial fluctuation and is roughly related to the trend of the growth of the GDP, barring several deviating fluctuations.

Figure 11: Industrial production of the USA

(Source: Usa.gov, 2017)

Barring the huge decline in 2008 to 2010, the industrial production of the country have maintained a consistency with time, with the rate varying within 0% to 5%.

Figure 12: Comparison of all the indicators of the USA (2005-2017)

(Source: As created by the author with the help of data provided above)

Oil being one of the primary components for the increase in the expansion and operation of any industry and Australia being a net importer of oil, the changes in the oil prices have significant impacts on its industrial production. A decrease in the former facilitates expansion of industries. As can be seen from the above figures, the country is expected to prosper from the falling prices of crude oil.

The same goes for the USA as the industrial production is expected to get facilitated by the fall in the prices of the oil and vice versa.

The oil prices have a significant impact on the industrial production of any country, as oil is required essentially for production, transportation, and construction. A fall in the prices positively affect the industries of a country barring the oil producing sector as in this sector the revenues fall, leading to negative implications on the overall profit and employment scenarios. a hike in the prices, however, benefit this sector but hamper the overall industrial productivity of the countries. Both Australia and the USA being net importers of oil, a decrease in the price of oils is favorable for the industrial developments of the same.

Impact of Inflation and Interest Rates on Economic Growth

The major economic issue Australia is facing includes a withering out of the mining boom and a related rise in the unemployment, which is becoming more adverse with time. To cope up with the same the country needs to diversify its resources as well as labor to other potential sectors like electricity and others such that the dependency on this sector reduces significantly and the economy does not get majorly affected by the falling in productivity of the mining sector.

One of the primary issues which is faced by the US in the recent times is the disparity in the productivity and real wage rates. This can be addressed by creating proper employment scopes and also expanding the trade relations of the country with other economies.

In the recent times Australia tries to keep the rate of inflation within 1% to 3%, which is neither too low to create a stagnancy in productivity nor too high to affect the standard of living of the people of the country. This is primarily done by the RBA by maintaining a steady currency exchange rate and a balance between contractionary and expansionary monetary policies.

The USA, on the other hand, controls inflation by regulating the interest rate in the country. Usually the country increases the Fed fund rate to facilitate increase in the savings of the country when it is required to lower the rate of inflation of the country.

The government of Australia has monopolies in rails, postal services and water, primarily. These services being public goods in nature are non-excludable and non-rival, ones’ enjoying their privileges cannot prevent others from enjoying them. Therefore, leaving these sectors in the hand of the private sectors can lead to issues regarding proper distribution of these resources.

The government of the USA also enjoys monopolies in the mail delivery, road, primary education systems and the government keeps this industries as monopolies due to the same reason as discussed above for Australia.

To combat and restrict unwanted monopolies in the country, the Australian Government has implemented a set of laws, under the wing of Competition Laws, which facilitates the prevalence of fair competition among the firms of the industries in the market. Apart from this the country also has liberal trade policies devoid of trade restrictions and tariffs, which creates scope of competitions, along with proper protections for the small and vulnerable domestic industries.

Barring few exceptions, the USA also promotes fair competition in the market and for that purpose the country has implemented an antitrust law, which is a collection of laws of both the state as well as those of the federal governments those are targeted to keep a vigilant eye to protect competitive atmosphere in the market. The Sherman Act (1980) also was implemented to rule out the unfair monopolistic practices in the commercial sector of the country.

Economic Issues and Potential Solutions

Monopolistic competition is another form of competitive market having a few features of the monopolistic construct too. This type of market form encourages free entry and exit from the market and also encourages differentiated products thereby emphasizing on both efficiency and variations in the quality. This in turn helps the industries of a country to become cost effective and competitive and this in its turn contributes to the economic growth of the country (Zhelobodko et al., 2012).

For instance the hospitality industries, especially hotels and pubs in both Australia and the USA are examples of such construct and their success and growth potential shows the viability of the contributions of monopolistically competitive market in the economic growth.

The Australian economy undertakes discretionary and medium-term fiscal policies to maintain a fiscal sustainability and to restrict building up of unwanted public debt. There are provisions in the framework to have space for stabilizers such that they go at par with the monetary policies. The country maintains a stability in the monetary framework with the interest rates and exchange rates such that the inflation remains at a moderate level and the commercial productivity is also facilitated.

The Government of the USA also facilitates the commercial activities by maintaining a stable interest rate framework such that the investments are facilitated and the liberal trade policies and taxation framework encourages business and setting up of international trade relations. The fiscal policies include high government as well as private consumption and investment, which in turn increase the productivity of the country.

In Australia, one of the most prominent companies venturing in the supermarket industry is the Woolworths. The company operates in an oligopoly market as it has only one major competitor, the Coles and together these two occupies the lion’s share of this supermarket industry. On the other hand, the Waste Management Corporation is a public company in the USA, which primarily deals with waste management and disposal of the country and operates in a near monopoly structure.

The Woolworths Supermarket, being an oligopolistic firm enjoys huge share of market as well as market power in the country. However, the market power of the company is subjected to the government policies prevailing in the economy. If the government encourages competition in the industry and facilitates entry of new and protected companies, then the market share and the revenues of the company will be significantly affected (Arli et al., 2013).

The Waste Management Corporation being a public monopoly in the USA, is highly protected by the government policies as this monopoly is maintained by the government and the company, therefore, enjoys economies of scale, which will be ruled out if newer firms enter in the market.

The Woolworths, being an oligopolistic supermarket, enjoys a moderately inelastic demand as the company ventures in a more or less duopolistic industry, which deals mainly in daily necessary commodities of the households. On the other hand, the Waste Management Corporation, being a monopoly, enjoys almost perfectly inelastic demand as the service which they provide do not have any close substitute in the country.

The Woolworths has the scope of capturing more market share in the Australian supermarket industry by focusing on innovations in technology, which can increase their cost effectiveness, and they can also venture in cities other than the main urban localities.

The Waste Management Corporation on the other hand is already a monopoly and can even expand their revenues by adapting innovations in waste disposal and renewal such that they can earn revenue from the same.

References 

Abs.gov.au (2017). Australian Bureau of Statistics, Australian Government. [online] Abs.gov.au. Available at: https://www.abs.gov.au/ [Accessed 20 Oct. 2017].

Arli, V., Dylke, S., Burgess, R., Campus, R., & Soldo, E. (2013). Woolworths Australia and Walmart US: Best practices in supply chain collaboration. Journal of Economics, Business & Accountancy Ventura, 16(1).

Bergsten, C. F., & Gagnon, J. E. (2012). Currency manipulation, the US economy, and the global economic order (pp. 1-25). Washington, DC: Peterson Institute for International Economics.

Dyster, B., & Meredith, D. (2012). Australia in the global economy: Continuity and change. Cambridge University Press.

Opec.org (2017). OPEC : Home. [online] Opec.org. Available at: https://www.opec.org/ [Accessed 20 Oct. 2017].

Usa.gov (2017). U.S. Data and Statistics | USAGov. [online] Usa.gov. Available at: https://www.usa.gov/statistics [Accessed 20 Oct. 2017].

Zhelobodko, E., Kokovin, S., Parenti, M., & Thisse, J. F. (2012). Monopolistic competition: Beyond the constant elasticity of substitution. Econometrica, 80(6), 2765-2784.