Bus7001 Economics Entrepreneurship & Innovation Assessment Answers

Obtain data on key macroeconomic indicators: real GDP, interest rates, unemployment rate, CPI and inflation rate, exchange rate, exports and imports.

Statistics (in tabular form) of real GDP growth rates, inflation rates, unemployment rates, exchange rates, real interest rates and the rate of change of net exports (NX) and briefly comment on each variable.

Produce pair-wise graphs of real GDP growth rates, inflation rates, unemployment rates, exchange rates, real interest rates and the rate of change of net exports (NX).

Use the information obtained in above to answer the following questions:

Critically analyse and discuss plausible economic explanations, including the role of government policy (fiscal or monetary), for the salient relationships between real GDP growth and other indicators.

Based on your summary statistics, graphs and analysis and discussion above, write a short prediction of the macroeconomic outlook of Australia. Is Australia likely to experience a recession or expansion soon?

Introduction

Australia is considered one of the wealthiest countries in the Asia Pacific region. For nearly twenty five years the country has experienced economic expansion. It has not experienced a recession within those periods despite the presence of the Great Recession in 2009. The country has however, experienced fiscal deficits which may have influenced the level of GDP, inflation and unemployment of the country. Globally, the country is considered as a leader in various economic sectors that include technology, manufactured goods and services industry. The minerals and agriculture industry form a great part of the export industry of the country.  The positive nature of the economy has been contributed by the well-functioning legal system that has accommodated entrepreneur development. All industries are free to engage in a foreign capacity and the country has a skilled ready workforce available making it an attractive investment destination. Deregulation has increased competition in the finance industry. However a strong rule of law as well as the impartial and independent judiciary enables the protection of property rights as well as keeps the level of corruption in check. The tax burden accounts for 275 of the GDP with a public debt of 36.8%. The country engages in moderate trade with a net export level of 41%. The country has a high level of privatized enterprises that have increased level of innovation and competition. This paper will consider macroeconomic indicator data from 1990 to 2016 in order to further understand the effects of fiscal and monetary policies on the economy of Australia as well as develop a general forecast of expected economic conditions.

Economic Data

Economic Growth - GDP

GDP (Gross Domestic Product) is a measure of the overall economic performance of a country over a period, normally a year. The GDP of Australia is calculated by the Australian Bureau of Statistics who use either the production, expenditure and income methods to arrive at an accurate estimate through seasonal adjustments (Lenzen, 2003, 23). It is an account of economic inflows and economic outflows.  GDP is considered as an important indicator of economic growth. This is because it takes into account all economic activities that take part in the country. Over the last 10 years, Australia’s GDP has been increasing over the years except for the shock experienced in 2009 where it experienced a reduction. The year has had an average level GDP of 2.7% and a median of the same amount. The GDP has a range of 1.5% with a minimum value of 2.3% and maximum value of 3.6%. The GDP has been contributed by an increase in the demand for raw commodities from the emerging countries which has risen the terms of trade. Also, the country has experienced an increase in the household purchasing power. The country has also experienced a boom in the mining industry which has been regarded as a major driver of economic growth in Australia. Other sectors that have significantly contributed are the service sector and the financial sector. From 1990 to 2016, the GDP fluctuated, this might have been due to the decline in the global economic conditions. However, the GDP of Australia is rightly skewed meaning it has the potential to increase higher. However, it might have a high spread over how it may vary over the years.

Inflation Rate

The inflation rate is a measure of the increase in price levels over a period of time. Australia measures its inflation rates through the rise in the consumer price Index annually. The consumer price index is the average price of a basket of consumer goods in a particular year compared by the average price of the same basket of goods over a certain base year (Downes and Tupil, 2014). The data reveals that the average inflation rates for the country are 2% .The Australian inflation over the least 5 years has a negative Kurtosis which shows a lesser spread and a slightly positive Skewness which shows that it is slightly above 1%.

The consumer prices have been steadily increasing due to demand and market expectations. The high prices have been attributed to the alcohol and tobacco industry, education and health as well as transport industry. Despite the prices for furniture and household equipment declined, there has been an increase in the food industry.

There is a positive correlation between the inflation rate and the GDP levels in Australia. Similar patterns can be observed in 2012, 2013 and 2015. This shows that the increase in price levels is also visible in the GDP levels. This is an expected behavior since the commodities for which price levels are experienced are part of the economic inflows and outflows accounted for in the GDP.  It also aligns with the fact that there have been increases in the household purchase parity which may have increased demand for goods which leads to increased price levels. An expansionary fiscal policy often leads to inflation. An increase in the government expenditure may increase the aggregate demand which may lead to increase in prices.

Unemployment

Unemployment rate is a measure of how many individuals in the work force are not engaged in an income generating job. The unemployment rate is measured through assessing population statistics of Australia (Downes and Tupil, 2014). The data for the last twenty five years reveals that the average unemployment rate is 5.64% with a median of 5.7%. The data reveals a negative kurtosis which reveals a relatively low spread as well as a slight positive Skewness which means that the unemployment levels are positive. There has been a general decline in the unemployment rate which was due to the increase employment opportunities created in the country both part time and full time. Due to a stabilization of the labor market participation rate at 64.8%, the unemployment also experienced a decline.

The graph between the unemployment rate and the GDP reveals that both of them have cycles in a similar manner. This shows that the fiscal policies do have an effect on the unemployment rates of the country. Expansionary fiscal policies lead to reduction in unemployment rates while the Contractionary fiscal policies lead to an increase in the unemployment rates. In the case of Australia, the budget is highly a deficit budget though the government can alter the budgetary allocations in various industries in order to create incentives or subsidies (Plumb and Bishop, 2013, 35).

Exchange Rate

The exchange rate is a measure of the country’s currency relative to another country’s currency. Australian Dollar is strongly measured against the US dollar. The mean exchange rate of the Australian dollar against the US dollar is 0.9 which means for each US dollar, the Australian dollar is valued at 0.9. It has both a negative kurtosis and a negative Skewness. This means that while it has a low spread, it has a likelihood of declining instead of increasing. Over the twenty five years, it has a range of 0.31 with a minimum of 0.73 and a maximum of 1.04.More recently, the Australian dollar decreased to 0.69 USD per AUD. However, it has since stabilized around the 0.71 mark. Due to the decline of the AUD, the commodity prices have increased to compensate for the weakening of the AUD.  The devaluation of the dollar was meant to stimulate economic growth in the country. The nature of the AUD has affected the nature of Australia’s exports and imports leading to a declining trade balance. However, there have been positive projections of the AUD stabilizing in the coming years.

Trade Balance

 A trade balance is derived from the net change of exports and imports. Generally, the trade balances over the last twenty five years are positive with a mean of 12.2 USD Billion with a positive kurtosis and a positive Skewness. The maximum level is 35.9 Billion and a minimum level of -13.1 Billion. The labor market has been weak due to the low wage growth. Regardless, there is high confidence in the business conditions motivated by the increase of credit available to business owners which contributed to positive trades.

Imports and Exports

Imports are the goods which the country buys from other countries while exports are goods and services sold to other countries (Manalo and Rees, 2015, 54). The mean import variation is 3% with a narrow spread and a positive Skewness. The expansionary fiscal policies led to an increase in the fixed investment which stimulated domestic demand. In addition, there was a decline in private savings which increased local demand as well as demand for imports. This high demand led to an increase in value of the US dollar compared to the AUD hence the fluctuations in the exchange rates.

The exports annual variation is 4.9% with a wide range for fluctuation and a negative Skewness. There was an acceleration of exports especially in the energy sector. However the low interest rates made the Australian exports cheaper than those from their United States counterparts.

In general, the net exports are heavily impacted by the value of the exchange rates of the AUD against the USD. Lower exchange rates show that the imports are more expensive when bought compared to the exports when sold. The net exports therefore favor the low level of the AUD against the USD. The net exports have therefore been reducing over the years greatly due to the fluctuations of the exchange rates.

Interest Rates

Interest rates are means by which the RBA is able to manipulate money supply and demand. Overall, the interest rates have been declining over the last 5 years. The RBA has managed to keep the cash rate steady due to expected economic conditions and commodity prices (Manalo and Rees, 2015, 57). The RBA maintains an expansionary monetary policy in order to slightly increase inflation and stabilize the domestic economy especially due to the weak wage growth and low labor market conditions. However, the RBA may not reduce the interest rates all the way through as it may be detrimental to Australia’s economy. It may increase demand for debt which may inflate the housing prices.

The movement of the policy interest rates is directly positively correlated with the Economic growth. This indicates that the policy interest rates may have an influence in the GDP and vice versa. High interest rates may lead to decline in money demand, this may reduce the aggregate demand. However, decrease in interest rates may increase money in circulation which increases the aggregate demand and inflation in turn.

General Economic Outlook and Prediction

According to the data presented of the macroeconomic indicators, it is clear to see that while Australia may not experience a recession, it may experience an economic slowdown. First, the GDP has been declining in the recent years. Also, the labor market is underperforming with a hike in prices in the housing market that may increase the financial risks of credit obtained. There is need for the government to stabilize the housing prices as well as the labor market. This means that the RBA cannot undertake any strong fiscal and monetary policies which may cause unnecessary shocks to the economy. In addition, the exchange rate has stabilized which means that the economy may also stabilize in the coming years. It may therefore not experience an expansion but will surely experience a slowdown.

Universally, inflation has been low for a few years, reflecting extra capacity in labor nd ware markets. This proposes feature swelling rates will stay beneath national bank focuses for quite a while yet, especially in cutting edge economies, in spite of the fact that the current ascent in oil costs, if supported, ought to put a little upward weight on expansion.

The terms of exchange have been changed somewhat higher in the close term since the February Statement, taking after the expansion in ware costs over late months. The ascent in product costs halfway mirrors the impact of positive feeling on ware request taking after the declaration of China's development focus for 2016. Notwithstanding, it is accepted that the costs of mass items won't be supported at current levels. Undoubtedly, the conjectures for iron metal and coal costs after 2016 have not been amended higher. This mirrors a desire that Chinese steel request will decrease throughout the following couple of years, to a great extent as already figure. Likewise, a considerable increment in worldwide generation of minimal effort press mineral is normal throughout the following year or two. Moreover, the conjectures accept that there will be just a constrained lessening in the supply of iron mineral from high-cost makers, especially those in China, over the figure time frame. The expansion in oil costs over late months has additionally influenced the terms of exchange and its viewpoint. Presently, higher oil costs have a tendency to diminish the terms of exchange since Australia is a net oil merchant. Notwithstanding, as fares of condensed gaseous petrol increase, an ascent in oil costs will, independent from anyone else, tend to build Australia's terms of exchange on the grounds that the cost of LNG is connected to the cost of oil.

While the GDP growth rate may decline over the coming years, the level of unemployment will decrease due to the spare capacity created by a decline in inflation. The balance of trade is likely to increase given the AUD continues weakening against the dollar.

References

Downes, P.M., Hanslow, K. and Tulip, P., 2014. The effect of the mining boom on the Australian economy.

Focus - Economics. Australia Economic Data. Available at https://www.focus-economics.com/country-indicator/australia/[Accessed 23 May 2017]

Lenzen, M., 2003. Environmentally important paths, linkages and key sectors in the Australian economy. Structural Change and Economic Dynamics, 14(1), pp.1-34.

Manalo, J., Perera, D. and Rees, D.M., 2015. Exchange rate movements and the Australian economy. Economic Modelling, 47, pp.53-62.

Plumb, M., Kent, C. and Bishop, J., 2013. Implications for the Australian economy of strong growth in Asia. Reserve Bank of Australia.

Trading Economics. Australia Economic Data. Available at https://www.tradingeconomics.com/australia/[Accessed 23 May 2017]

World Bank. Australia Economic Data. Available at https://www.worldbank.com/australia/[Accessed 23 May 2017]