BUS700 Economics Evaluation of the Macroeconomic Performance

Discussion and analysis

According to the aggregate demand theory of macroeconomics, the growth rate of the economy is related to the inflation rate of Australia as well. Australia has shown a positive growth rate over the years after 1993 and its impact has been seen on the wage rates of the labours of the country. This has influenced the aggregate demand for the goods and services of the economy which in turn increased the inflation rate. Labonté  (2018) stated that with the increase in the GDP of a country it is very natural for the inflation rate to go up especially if the impact of the business cycle is high.  

In case of Australia, the relationship between the two variables has not been found mainly because of the business cycle associated with and the policies of the government to change inflation rate of the country. The correlation coefficient, in this case, is -0.019661 which is very insignificant to say that these two variables are related to each other (Castelnuovo and Tran, 2017).

Relationship between real GDP growth rate and the unemployment rate

According to the principle of economics, the unemployment rate of the country and GDP growth rate is related to each other. Okun's law stated that 1% decrease in the unemployment rate of the economy, GDP of the economy increases by 3%. However, Temple, Rice, and McDonald (2017) stated that empirical evidence can be different from the theories due to the policies of the government.

In the case of Australia, the unemployment rate has reduced since the level of 1991. The unemployment rate mainly reduced during the years 2003 to 2007 due to the mining boom that it experienced. However, post global financial crisis has increased the unemployment rate of the economy. The unemployment rate of the economy of Australia is related to the GDP growth rate of the country (Tian et al. 2017). The correlation coefficient between the variables is -0.241289. This means there exists a moderate negative relationship between the variables. However, it deviates a little from the theoretical level due to the fact that, the business cycle has worked and the policies of the government. The policies of the government in case of Australia have been directed to smooth the indicators such as the unemployment and inflation.

Discussion of the relationship between the net export and exchange rate for USA and Australia

The net export of a country is the total volume of export minus the import. The next export of any country is dependent on the value of the currency or the exchange rate (Blyth and Matthijs, 2017).  When the value of the domestic currency increases it is beneficial for the importer and vice versa.

The trend line in the above figure shows that the next export falls with the increase in the exchange rate. Apart from that the correlation coefficient which in this case is -0.962197 also suggests that the relationship between the variables is very strong and negative. This is due to the facts the reduction in the exchange rate reduces the import and hence increases the net export.

However, in case of Australia, the relationship between the real exchange rate and the net export is less strong than that of Australia’s. The trend line in the above graph shows that despite the changes in the value of the currency of the country, the import and export is unchanged. Ahmed and Wadud (2017) commented that this due to the fact that dollar is the main form of transaction in the world. The reduction in the value of the dollar does not impact the import and export of USA and hence the net export remains same. The correlation coefficient for the variables in case of USA is -0.202333 which shows although a negative relationship exists in case of USA as well, the magnitude of the relationship is much weaker in the case of USA.

Relationship between the cash rate of Australia and the Federal Reserve rate of USA

The fund's rate is one of the important equipment of Federal Reserve of the USA. According to Nagaraj and Motiram (2017), changing the fund's rate which is the rate at which bank lends money to each other, the nominal value of the economic indicator of the economy can be influenced. One of the important targets for the Federal Reserve is the inflation and the unemployment rate. Another economic value that gets impacted by the change in the fund's rate is the value of the currency of the USA relative to the other currencies of the world.

The value and the demand for dollar in the market increase due to the fact that the fund's rate of Federal Reserve increases the money supply in the market. The increased money supply also results in more transaction. According to the quantity theory of money, when the money supply and the number of transaction in the market increase, the production and the prices of the goods and services in the market are bound to increase (Nong, Meng and Siriwardana, 2017). Thus, the immediate impact of the change in the fund's rate of the USA is the inflation in the market. This is also associated with high demand for the domestic products and hence the value of the dollar increases in the market.

Given that the value of the dollar in the exchange market is very important for other countries of the world as the dollar is the international currency, the value of the other currency also changes. With the increase in the value of the dollar the value of Australian dollar falls and hence the government changes the cash rates in order to maintain a steady value for the currency (Foerster et al.  2017). However, the process used by the company in order to change the value of the Australian currency is the cash rate. It is the rate at which the central bank of Australia provides a loan to the commercial banks of the country. With the increase in the cash rate the supply of money in the market will go down and hence, transaction demand for money will increase giving a rise in the value of Australian dollar.

In the past, the central bank of Australia has used this policy a number of times in order to deal with the changes in the fund's rate of the USA. Furlanetto and Robstad (2017) in this context stated that, although this process is a good way to maintain the value of the Australian currency and the net export of the market, it increases the inflation in the market. According to the data, the inflation of Australia got impacted due to the changes in the cash rate followed by the central bank of the country. Nevertheless, it is important for the central bank of Australia to control the value of Australian dollar through the cash rates of banks as this is the best and fast way to influence the demand for currency in the market (Berg, 2017).

Prediction for the macroeconomic outlook of the Australian economy

Based on Australian performance in terms of macroeconomic indicator, it can be said that the current performance of the company and the policies of the government are going hand in hand. In addition to that, the government also have taken the responsibility in order to balance the economic indicators of the economy as well (Kishor and Marfatia, 2017). The real exchange rate of Australia and its impacts on the net export clearly states that the influence of business cycle is only minimal in case of Australia. Along with that the exchange rate or the value of the Australian dollar has also been very strong in the last few years.

Now, given the mining boom that the economy of Australia just experienced, it is expected that the economy of Australia will experience a boom in the near future (Taylor and Tyers, 2017). This is due to the fact that, the mining boom has increased the average wage rate of the labours of the country. As compared to the figure in the year 2000, the average wage rate in 2014 is 37% more ignoring the inflation. Furthermore, the investment inflow in the economy of Australia is also increasing due to the impressive performance of the manufacturing industry of the country (Bjørnland and Anders Thorsrud, 2017). The analysis above showed that rise in GDP hardly impacts in the inflation rate of the country. Therefore, high investment inflow and the following increase in the GDP of the country are not going to be a risk for the economy of Australia. The unemployment rate in the Australian economy is also expected to reduce with the increase in the GDP of the country (Chang, Hsu, and McAleer, 2017). Therefore, there is no risk for recession in the Australian economy in the near future if an external event like global financial crisis does not harm the economy.  

Recommendations

The above study shows that the macroeconomic variables of the Australian economy are strongly related to each other and government policies have absorbed most of the fluctuations due to the business cycle. However, it is recommended to the government of the country is to reduce the support provided to the economy in order to stabilise the economic indicators. This will enable the economy to use the self-recovery system in order to let the economy grow in the future. The current assisted economy is very vulnerable to the external changes. The global financial crisis could not harm the Australian economy due to the fact that mining boom increased the aggregate demand and wage rate beforehand otherwise the financial crisis would have been troublesome for the economy.

In addition to that, the analysis shows that net export of the country increases very strongly with the reduction in the exchange rate of currency. However, it is recommended to the government and the central bank of the country to reduce the value of the currency only there is a case of low aggregate demand in the market. The extreme low exchange rate of the economy will increase the debt liability of the country. given that the country still has a lot of debt liability it is not desirable that the exchange rate for Australian dollar reduce significantly as it will increase the liability.

Conclusion

Therefore, the economy of Australia is strong and the macroeconomic variables have a strong relationship among themselves. In other words, the economy of Australia follows the theories and the principles of macroeconomics. The GDP growth rate of the country does not increase the inflation rate much and can be used as a positive point. On the other hand, the employment rate of Australia increases with the GDP growth rate of the country. Compared to Australia, the relationship between real exchange rate and the net export is very strong and hence can be used as a tool to boost the aggregate demand for the goods and the services of the economy. The estimation suggests that any kind of recession or drop in the demand for goods and the services along with the real per capita income is unlikely in the near future.

Reference

Ahmed, H.J.A. and Wadud, I.M., 2017. Oil Price Volatility And Sectoral Returns Uncertainties: Evidence From A Threshold-Based Approach For The Australian Equity Market. The Journal of Developing Areas, 51(1), pp.329-342.

Beaudry, P., Galizia, D. and Portier, F., 2017. Is the Macroeconomy Locally Unstable and Why Should We Care?. NBER Macroeconomics Annual, 31(1), pp.479-530.

Behlul, T., Panagiotelis, A., Athanasopoulos, G., Hyndman, R.J. and Vahid, F., 2017. The Australian Macro Database: An online resource for macroeconomic research in Australia.

Berg, C., 2017. Regulation and red tape in a small open economy: an Australian overview.

Bjørnland, H.C. and Anders Thorsrud, L., 2017. The ‘Dutch disease’reexamined: Resource booms can benefit the wider economy. LSE Business Review.

Blyth, M. and Matthijs, M., 2017. Black Swans, Lame Ducks, and the mystery of IPE's missing macroeconomy. Review of International Political Economy, 24(2), pp.203-231

Castelnuovo, E. and Tran, T.D., 2017. Google It Up! A Google Trends-based Uncertainty Index for the United States and Australia. Economics Letters, 161, pp.149-153.

Chang, C.L., Hsu, H.K. and McAleer, M., 2017. A Tourism Financial Conditions Index for Tourism Finance. Challenges, 8(2), p.23.

Chidozie, U.E. and Ayadi, F.S., 2017. Macroeconomy and Banks’ Profitability in Nigeria. African Research Review, 11(2), pp.121-137.

Foerster, A.C., Peel, J., Osofsky, H.M. and McDonnell, B., 2017. Keeping Good Company in the Transition to a Low Carbon Economy? An Evaluation of Climate Risk Disclosure Practices in Australia.

Furlanetto, F. and Robstad, Ø., 2017. Immigration and the macroeconomy: Some new empirical evidence.

Gargano, A., Pettenuzzo, D. and Timmermann, A., 2017. Bond return predictability: Economic value and links to the macroeconomy. Management Science.

Kaufman, B.E., 2018. How Capitalism Endogenously Creates Rising Income Inequality and Economic Crisis: The Macro Political Economy Model of Early Industrial Relations. Industrial Relations: A Journal of Economy and Society, 57(1), pp.131-173.

Kishor, N.K. and Marfatia, H.A., 2017. The dynamic relationship between housing prices and the macroeconomy: Evidence from OECD countries. The Journal of Real Estate Finance and Economics, 54(2), pp.237-268.

Labonté, R., 2018. From mid-level policy analysis to the macro-level political economy: Comment on "Developing a framework for a program theory-based approach to evaluating policy processes and outcomes: Health in All Policies in South Australia.". Int J Health Policy Manag.

Nagaraj, R. and Motiram, S. eds., 2017. Political Economy of Contemporary India. Cambridge University Press.

Nong, D., Meng, S. and Siriwardana, M., 2017. An assessment of a proposed ETS in Australia by using the MONASH-Green model. Energy Policy, 108, pp.281-291.

Taylor, G. and Tyers, R., 2017. Secular stagnation: Determinants and consequences for Australia. Economic Record, 93(303), pp.615-650.

Temple, J.B., Rice, J.M. and McDonald, P.F., 2017. Ageing and the economic life cycle: The National Transfer Accounts approach. Australasian Journal on ageing, 36(4), pp.271-278.

Tian, X., Dai, H., Geng, Y., Huang, Z., Masui, T. and Fujita, T., 2017. The effects of carbon reduction on sectoral competitiveness in China: A case of Shanghai. Applied Energy, 197, pp.270-278.