Gross Domestic Product (GDP)
The economy of Australia, has over the decades, developed significantly and prospered immensely, thereby becoming one of the dominating economies across the globe. However, the economy has been subjected to considerable fluctuations and dynamics, both positive as well as negative, much of which can be seen to be seen from the fluctuations in the macroeconomic indicators (Schneider 2012). Keeping this into consideration, the concerned assignment tries to analyse and discuss the dynamics in different macroeconomic indicators, in accordance to the data collected, thereby predicting the future trends in the economy of the country.
The primary economic indicator of growth of the economy of the country is the Gross Domestic Product of the country, which measures the total value of the final goods and services which are produced within the geographical domain of the concerned country within a particular period, usually one economic year. The primary components of the indicators are the consumption and private investment expenditures, the spending of the government and also the total value of the net exports (which is calculated by deducting the total value of imports from the total export value) (Mankiw 2014). That is,
GDP = C + I + G + NX [Where the symbols have their usual meaning]
Thus, from the value and dynamics of this indicator, the total productivity of the country within a particular period and also the overall standard of living of the population of the country can be gauged. GDP, again, can be broadly classified into two types- Real GDP and Nominal GDP. While the Nominal GDP shows the total money value of the production in the country, the Real GDP adjusts the value of the same for inflation or dynamics of price rates in the country (Burda and Wyplosz 2013).
In this context, inflation, can be asserted as another economic indicator of primary significance in the country and shows the overall changes in the average levels of price of products and services in a country with time, which in turn, highlights the overall economic well-being of the population of a country. Keeping this into consideration, the following figure shows the relationship between the Real GDP growth rate and the rate of inflation of Australia, over the years:
From the above figure, showing the dynamics of the rate of inflation and that of the Real GDP Growth Rate of Australia, over the years (1990-2016), it can be asserted that the GDP Growth Rate of the country has been subjected to considerable fluctuations, both positive as well as negative, over the years, with the rate becoming negative in 1993,1998, 2001, 2009 and 2014-2015 onwards (Dyster and Meredith 2012). Much of this can be attributes to the national or international financial and economic crisis periods (like that in 2008-2009, which marked the occurrence of the Global Financial Crisis) and so on. Again, the indicator also shows growth rates as high as 30% in 2004 and nearly 25% in 2011.
Inflation and Real GDP
However, the rate of inflation of the country, unlike that of the former indicator, shows a highly stable and more or less moderate trend over the concerned period, with the rates ranging between 1% to 4%. This in turn, indicates towards the presence of an economic stability and a good health of the economy as a whole contributing to the overall well-being of the residents of the country (Gregory and Smith 2016).
Apart from the rate of inflation, another economic indicator of considerable significance in a country, is that of the rate of unemployment in the country. This is because the level of employment and job creation in a country depicts the economic welfare of the population of the country as a whole, their purchasing power, demand patterns, which in turn have implications on the overall economic productivity or GDP of the concerned country (Argy and Nevile 2016). Keeping this into consideration, the relationship between the rate of unemployment and Growth Rate of Real GDP.
In the theoretical framework of economics, there is a concept known as the Okun’s Law, which indicates towards the presence of a relationship between the rate of unemployment and GDP in a country. As per this law, with 1% fall in the GDP of the country, the unemployment usually increases by 2% and vice versa.
Keeping this into consideration, in case of Australia, it can be seen that during 1990-1991, both the indicators showed increasing trends, thereby denying the Okun’s Law. However, in 2001-2004, the trends in the concerned indicators are seen to follow the Okun’s Law, as can be seen from the increasing trend of the GDP and a simultaneously decreasing trend in unemployment of the concerned country. Again, during 2008-2009, at the times of Global Financial Crisis, the GDP of Australia can be seen to be decreasing sharply and the unemployment also increased to some extent, which also asserts the previous observations (Blanchflower et al. 2014). However, in an overall framework, the rate of unemployment of the concerned country can be seen to be more stable than that of the Real GDP of Australia.
The term “Business Cycle”, in the conceptual framework of economics, refers to the series of cycles of contraction and expansion of economies with time, which in other words refers to the natural dynamics in the economic growth of a country or a region over time. In general, a business cycle consists of four stages which are:
- Expansion
- Peak
- Contraction
- Trough (Galí 2015)
Unemployment and Real GDP
The nature of business cycle in an economy helps in analysing the trends as well as the overall health of the economy over a period.
Keeping this into consideration, in case of Australian economy, the presence of a business cycle can be clearly asserted. The economy of Australia experienced expansionary phases in 2001-2004, 2006-2008. On the other hand, in 2008-2009, the growth of the economy of the country experienced immense decline, owing to the occurrence of the Global Financial Crisis, which affected the country considerably and this period, which drove the economic growth rate from its peak in 2008, to a negative trough in 2009, can be termed as a recessionary or contractionary phase for the country, following which the economy of the country can be seen to enter into a phase of recovery. These movements in the economic growth of the country indicates towards the clear presence of business cycle in the economy of Australia (Morley and Piger 2012).
A significant component of the GDP of a country, as discussed above, is the value of the net exports of the country, which in turn shows the value of total exports less the value of total imports by the same. On the other hand, the exchange rate of the domestic currency of a country is the price of the same in terms of the value of the domestic currency of the country in comparison. In general, while measuring the exchange rate dynamics of a country, the value of the currency of the USA, that is the value of US dollar is taken as a yardstick and the concerned currency and its exchange rate is measured with respect to the value of the dollar.
Keeping this into account, the exchange rate of AUD against USD and the net exports of the same, within the time period of 1990-2016, as well as the relationship between the two variables.
As is evident from the above figure, the rate of change of the exchange rate of the domestic currency of Australia with that of the US dollars, has remained more or less stable, over the concerned period of time. However, as far as the international trade dynamics of the country is concerned, it can be seen that the net exports of Australia, barring a few fluctuations, has most of the time, remained negative, which in turn, indicates towards the fact that country has over the years remained a net importer of goods and services from other countries. Only in 2011, the country can be seen to have positive net exports (Handley 2014). Australia in general exports minerals, precious metals like gold, iron ore, coal and petroleum gas and is the 23rd largest exporting countries in the global scenario. However, the country is one of the biggest importers in the world, the import basket of the country mainly consisting of automobiles, refined petroleum, computers and technological commodities.
Business Cycle
In order to analyse the presence or absence of any relationship between the net exports and the exchange rate of the concerned country, it is of utmost importance to define and differentiate the concepts of real and nominal exchange rates of the currency of a country. While the latter shows the amount of the domestic currency of the concerned country which needs to be exchanged in order to receive one unit of the foreign currency, the former shows the bundle of domestic commodities and services which needs to be exchanged in order to acquire a specific bundle of foreign goods and services.
In general, there exists robust relationship between the real exchange rate in the country and the net exports of the same, in the sense that with an increase in the real exchange rate, the capacity to import foreign goods and services and the value of the domestic currency with respect to that of the foreign currency in comparison increase, which in turn leads to an increase in the overall imports and vice versa (Thurbon 2015).
In this context, it can be seen that in case of Australia, the exchange rate can be seen to be seen to be more or less stable in terms of USD over the period, with the rates fluctuating little and remaining within the range of 0.6 to 1 USD in general. On the contrary, the net exports and trade balance of the country can be seen to be considerably fluctuating within the concerned period of time.
The Cash Rate in case of Australia or the Fed Funds Rate in case of the USA, refers to the rate of interest which the central monetary institutions of the countries charge from the commercial banks in case of overnight borrowings of money by the latter from the former. This in turn, acts as one of the primary variables in the monetary market mechanism as well as the monetary policy decisions in the country and also provides an insight about the inflation dynamics in the country.
In case of Australia, specifically, the monetary authority, that is, the Reserve Bank of Australia, forms the monetary policies with the objectives of inflation targeting in general, in the domain of which a targeted inflation rate is set at the beginning of a period and then the policy frameworks are designed to achieve the targeted rate of inflation, of which the cash rate is an integral tool. When the rate of inflation existing in the economy of Australia is less than the targeted level to be achieved, the RBA general lowers the cash rate, which in turn leads to a decline in the rate of interest in the economy as a whole, thereby encouraging borrowings of money and increase in the aggregate demand as a whole (Deans and Stewart 2012). This in turn raises the overall price levels in the economy, thereby taking the rate of inflation to the targeted level and vice-versa.
Net Exports and Exchange Rates
In contrast, the structure implemented by the Federal Reserve, that is, the monetary authority of the USA, for controlling and manipulating the funds rate, is that of the forward guidance method. Under this method, the central monetary institution of the country makes the monetary policies on the basis of their own forecasts and future expectations regarding the levels of prices and interest rates in the economy. The Fed adopts this policy framework and manipulates the interest rates accordingly for the monetary welfare of the economy as a whole.
Keeping this into consideration, the dynamics in the Cash Rate of Australia and the Fed Funds Rate of the USA, within the time period of 1990-2016 and their inter-relationships and connections (if any), within the concerned period.
The Cash Rate of Australia, from the above figure, can be seen to be declining consistently and considerably from 1990 to 1995, with the rate reaching to almost zero in 1995, post which the same rose considerably and maintained a more or less trend till 2003, before again declining significantly in 2004. Thereafter the fluctuations in this indicator can be seen to have been toned down to a significant extent.
On the other hand, the fluctuations of the Fed Fund’s Rate of the USA can be seen to be lesser in magnitudes as well as in frequencies compared to that of the fluctuations in the Cash Rate of Australia. However, from 2008, the Fed Funds rate can be seen to be achieving the zero bound, which can be explained to be intentionally kept by the financial authority of the country in order to stimulate economic growth and increase in productivity to recover from the intense Global Financial Crisis Period of 2007-2008. This low rate has been seen to be maintained for the last few years in the USA (Apergis and Cooray 2015).
Although there is not high linkage between the Cash Rate of Australia and the Fed Fund Rate of the USA, however, both of these rates have shown rough declining trends over the years, barring all the fluctuations and in the last few years, the rates of both the countries can be seen to be hovering in a low and moderate range.
From the above discussion and based on the empirical evidences which have been analysed and interpreted in the above sections of the concerned study as well as on the basis of the trends and occurrences in the economic domain of the country, it can be predicted that in the coming years the economy of Australia is expected to show positive trends. Although the mining boom has been withering out, however the country has been experiencing a considerable expansion in the service sector of the country. This in turn has also been creating new jobs in the country, with nearly 300,000 new jobs being created in 2017 only. This is expected to increase even more in the coming years (Varoufakis 2015).
Cash Rate and Monetary Policy
The fiscal deficits of the country are also been seen to be decreasing in the present years given the inherent deficit exit strategy and fiscal and monetary components of stability within the policy framework of the country, it is expected that the economy of Australia will mitigate any unanticipated downturn in the economy, provided the magnitude of the downturn is not considerably huge and unmanageable and also given that the exogenous economic condition of the world maintains stable trends. In the recent period, the inflation of the country can be seen to be remaining at a moderate and stable rate while the unemployment trait shows a gradual decline. This, clubbed with the impressive dynamics in the GDP of the country together indicate towards positive economic growth trend in the coming years. However, with the increase in the level of employments and the purchasing power of a greater share of population of the country, the aggregate demand is expected to increase, which may lead to a higher inflationary pressure in the coming years.
Conclusion
From the above discussions and analysis of the empirical evidences collected and evaluated, it can be concluded that the economy of Australia has been in an overall stable state in the current period. This can be seen from the performances of the primary indicators like GDP, inflation and unemployment rates in the country. The exchange rate of AUD can be seen to have maintained stability although significant dynamics could be observed in the aspects of net export volumes, the trends being mostly negative. However, with new jobs being created and with the rise in the aggregate demand in the country, Australia is expected to face an inflationary pressure in the coming years.
References
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Abs.gov.au (2018). 5368.0 – International Trade in Goods and Services, Australia, Mar 2018. [online] Abs.gov.au. Available at: https://www.abs.gov.au/ausstats/[email protected]/0/A5FB33BD2E3CC68FCA257496001547A1?Opendocument [Accessed 22 May 2018].
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