Real GDP Growth Rate
United State is highly developed economy following the principle of a mixed economy. The economy stands first in terms of accounted nominal GDP. USA account second highest per capita income in terms of purchasing power parity (Fishlow, 2018). Among several contributors of economic growth, the major being large amount of natural resources, technological advancement and good infrastructure. The severe recession in 2008 slowed down the economy largely. Even after recovery, the economy still no backed to the path of previous economic boom. Australia also is an important global economic player having sound economic condition. Service sector makes the largest contribution to Australian GDP (Manalo, Perera and Rees, 2015) Australia successfully maintained a steady pace of economic growth in line with stable prices and high employment. International trade is one bigger contributor of economic growth with the nation mainly exporting natural resource, primary goods and energy. In this paper, macroeconomic performance of both the nations are analyzed using various indicators.
The first important indicator for measuring economic performance is the trend in real GDP growth rate. Gross Domestic Product measures the aggregate output of a nation. It is computed by estimating the monetary value of produced goods and services in a nation. If market price of current year is used to compute GDP, then it is called nominal GDP (Antolin-Diaz, Drechsel and Petrella, 2017) The computation of real GDP on the other hand is based on the use of a fixed base year prices. Growth rate in GDP indicates rate of change in GDP overtime.
Table 1: Summary of real GDP growth rate in Australia
The descriptive statistics of real GDP growth rate shows mean GDP growth rate for Australia for the particular time range was 3.29 percent. Stability in economic growth depends on the variability of growth rate. For the series of real GDP growth rate of Australia, the standard deviation is obtained as 0.89. Smaller standard deviation means smaller variability in growth (Hatfield-Dodds, et al., 2015). The highest and lowest growth rate for Australia are 5.01 and 1.81 percent respectively.
Table 2: Summary of real GDP growth rate in USA
Summary statistics of real GDP growth rate of USA shows mean GDP growth rate for USA for the particular time range was 2.46 percent. For the series of real GDP growth rate of Australia, the standard deviation is obtained as 1.73. Smaller standard deviation implies a stability in growth. USA accounted the highest GDP growth rate of 4.69 percent in 1999. As against the highest growth rate, the economy recorded a negative growth rate of -2.78 percent in 2009.
Inflation Rate
Inflation rate in an economy is a measure of variability in the price level. It is measured by the rate of change in Consumer Price Index.
Table 3: Summary of rate of inflation in Australia
Descriptive measures of inflation rate in Australia point out that price level in the economy has grown at an average rate of 2.66 percent. Stability in the price level is a crucial aspect of economic performance over time. Standard deviation of inflation rate is 1.18. As the standard deviation is relatively smaller than mean inflation rate, coefficient of variation is smaller than one meaning a relatively lower variability in price level. Rate of inflation in Australia varies between 4.64 percent and 0.25 percent.
Table 4: Summary of rate of inflation in USA
The different summary measures of series of inflation in USA shows that price level in the economy has fluctuated at an average rate of 2.27 percent Standard deviation of inflation rate is 1.05. Following a relatively lower standard deviation, the coefficient of variation is smaller than one meaning a relatively lower variability in price level. For the USA economy, the maximum inflation rate is 3.84 and that of the minimum inflation rate is -0.36.
Rate of unemployment is a standard measure of labor market performance. Unemployment states a condition of joblessness where people despite their efforts to look for a job, fail to find a suitable one at the current wage (Goodwin, et al., 2015).
Table 5: Summary of unemployment in Australia
The average rate of unemployment in Australia is quite high with average unemployment rate being 6.10 percent. The unemployment series has a standard deviation measure of 1.29. Because of the smaller standard deviation, the measure variability is low indicating a stale series of unemployment for Australia. The incidence of unemployment was highest during the period 1995-1996 and the economy recorded the maximum unemployment rate of 8.50 percent (Carvalho, 2015). The lowest unemployment for the economy is during 2008 and the associated unemployment rate was 4.20 percent.
Table 6: Summary of unemployment in USA
The mean rate of unemployment in USA is relatively lower than Australia, with average unemployment rate being 5.98 percent. The unemployment series has a standard deviation measure of 1.69. Because of the smaller standard deviation, the measure variability is low indicating a stale series of unemployment for USA. The incidence of unemployment was highest during the period 2010 and the economy recorded the maximum unemployment rate of 9.60 percent. The lowest unemployment for the economy is during 2000 and the associated unemployment rate was 4.00 percent.
Unemployment Rate
The analysis of interest rate has implication for investment decision. It is the cost incurred by borrowers during on repayment of borrowed fund. Higher interest rate means a lower investment while lower interest rate is accompanied with higher investment level. Central bank of an economy lends fund to commercial banks at a fixed rate. This is a monetary policy instrument that controls money supply and interest rate. For Australia, the lending rate of central bank is called cash rate. The same in United State is known as federal fund rate.
Table 7: Summary of interest rate in Australia
As obtained from the summary statistics of cash rate for Australia, mean cash rate in the economy is 4.74. Cash rate was the highest in 1995. The cash rate then was 7.50 percent. Since then cash rate continued to decline indicating a monetary policy expansion. In 2015, RBA set the cash rate to the lowest level of 2.00 percent.
Table 8: Summary of interest rate in USA
The descriptive statistics of fund rate for USA mean cash rate in the economy is 2.72. Fund rate was the highest in 2000. The fund rate then was 6.24 percent. Since then fund rate continued to decline indicating a monetary policy expansion. In 2014, the Federal Reserve System set the fund rate to the lowest level of 0.09 percent.
Exchange rate refers price of one country’s currency presented in terms of other country’s currency. Here, unit price of a foreign currency is quoted in the unit of domestic currency. Exchange rate is a vital determinant of foreign trade and investment in a nation. Higher the value of domestic currency lower is the volume of export and vice versa.
Table 9: Summary of exchange rate in Australia
The descriptive measures of exchange rate series show average unit price of USD against the AUD is 1.10. Australia thus exchanged 1.10 AUD for every unit of USD. The exchange rate series is relatively stable with standard deviation being only 0.13. The highest value of exchange rate during this period was 1.34. In the series the lowest exchange rate 0.70.
Table 10: Summary of exchange rate in USA
Net export measures the net trade balance of a nation. It is obtained as export less import (Hubbard and O’brien, 2015). Net export is a vital component of GDP and influences GDP positively. Growth of net export shows the growth of international trade of a nation.
Interest Rate
Table 11: Summary of net export growth of Australia
Table 12: Summary of net export growth of USA
Different indicators representing economic performance of a nation are interrelated to each other. Unemployment, inflation, exchange rate, net export and interest rate influence economic activity and hence, growth of real GDP. An increase in real GDP growth implies expansion of economic activity and hence, a lower unemployment. Low unemployment again helps to boost average income resulting in a demand-sided inflation. Here comes the roles of interest rate. The central bank then increases interest rate to curb inflationary pressure. Two other indicators related with real GDP growth are exchange rate and net export. A relatively lower value of domestic currency implies higher export demand and increase trade balance. Higher net export again increase GDP resulting in a higher economic growth.
The real GDP growth rate of Australia in 1995 was 3.89 percent. The associated inflation and unemployment rate was 4.64 percent and 8.50 percent. Since then economic growth continued to increase along with a decline in the unemployment rate. Australia until 2009, experienced an uninterrupted economic growth together with a steady decline in unemployment (Cumming and Johan, 2015) Several factors have contributed to strong economic performance of Australia. Population in Australia grew at a quicker pace. A major contributor of economic growth in Australia was rise of China and associated export demand. Following the growth of net export, economic growth in Australia increased at a faster rate. The reason behind the negative relation between GDP growth and inflation is explained by the active intervention of monetary authority in Australia (Powell, Ryan, and Lamb, 2017) This can be seen from a continuous decline in cash rate of the economy reflecting policy of monetary expansion. The economic growth in Australia reached to the lowest level of 1.81 percent in 2009. Lowest growth rate in the economy during this time was resulted from global financial crisis occurred in 2008 (rba.gov.au, 2018). Because of the slow growth rate unemployment increased to 5.60 percent from the previous year of 4.20 percent. Inflation also reached to a significantly low level of 1.82 percent. Australian economy though recovered the financial crisis but again experienced growth slowdown resulted from China’s economic slump and lower export demand of mining.
The main pillars of macroeconomic policies of Australia are fiscal policy, monetary policy and exchange rate policy (aph.gov.au, 2018). Under fiscal policy, government adjusts its expenditure or tax rate in the economy for necessary support of the economy. The mechanism of automatic stabilizers adjust the fiscal policy associated with phases of economic growth. Reserve Bank of Australia designs the monetary policy in the nation. The objective is to keep the inflation rate within the targeted level along with a stable growth and inflation (Mishkin, 2017). The expansionary monetary policy of lowering the cash rates support Australian economy largely by stimulating investment. The exchange rate policy in Australia plays an important role in stabilizing currency and maintaining a good position in international trade. The Australian dollar appreciated strongly from 2006 to 2008 following an increase in global commodity prices. The exchange rate policy protects the economy from being over-heated during this time (rba.gov.au, 2018). The decline in exchange rate during global financial crisis protected Australia from an economic downturn during this time.
Exchange Rate
In the beginning of 1990s, the USA economy entered a recession caused by growing bankruptcies, decline in agricultural export and sharp decline in crop price and rise in interest rate. The recession combined with a decline in global oil price hurt the economy very hard. The slow recovery in the economy began in 1992. The economic growth in 1995 was 2.72 percent. Since then economic growth started to increases and reached to the highest rate of 3.79 percent in 2004. The main driver of economic growth in US was technological innovation. The growth of trade is another factor contributing to economic growth of America. The financial crisis occurred in 2008 resulted in an economy wide recession during this time. The growth rate became negative (Reed, 2016). Followed by economic slowdown unemployment in the economy rose to 9.20 percent while inflation became negative of -0.36.
Fiscal and monetary policy in crucial for the economy of USA. The evidence of expansionary monetary policy can be observed in terms of a declining interest rate in the economy (Medina, 2016) In order to recover the economy from financial crisis of 2008, the Federal Reserve System lowered the interest rate largely. The interest rate was at all-time lowest in 2014, with fund rate being 0.09 percent during this time. Fiscal policy is more likely to be used to fight against unemployment while stability in the inflation rate has been maintained through monetary policy.
The steady economic performance of Australia pointed towards a positive economic outlook. The GDP growth in the economy is expected to remain around 3 percent. The economy receives a strong support from public sector. The large infrastructural projects undertaken by government will contribute to a strong economic growth in future. The public demand is expected to make more than average contribution to the gross domestic product. The outlook for private investment also remained positive. Net export has a steady contribution to the economic growth. This is likely to strengthen the economy further. The economy however faces a threat in terms of a possible decline in consumer spending due to slow wage growth and declining house price (propertyupdate.com.au, 2018). Because of a slow-down in Chinese economy, decline in global commodity prices and housing price, some economist fear that Australia might head for a recession in coming years (Perry and Rowe, 2015) The cloud on Australian economy however can be possibly eliminated due to declining value of Australian dollar and boost in export.
Net Export
Conclusion
The economy of Australia constituted a steady economic performance contributed from expansion of trade, growth of industry and service sector. The average economic growth in Australia is even higher than that of USA. Both the economy faces a severe downturn during the global financial crisis. This was the time when Australia attained the lowest economic growth while USA grew at a negative rate. USA took a relatively larger time than Australia to overcome the crisis. The recent slowdown in Australian economy is largely due to economic shift in China and contraction of mining investment. With expansion of economic growth both Australia and USA have experienced a decline in unemployment rate. Stability in the price level has been achieved through active intervention of monetary authority. In Australia, exchange rate policy contributed to stabilization of currency and trade. Fiscal and monetary policy are the two main instruments of macroeconomic policies of government.
References
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