Australian Economy and Price Stability - Assignment Example

?Australian Economy and Australian Economy Introduction The government of Australia works with the Reserve bank in managing fiscal and monetary policies in the country. The bank was created by parliament in 1960 under a legislation known as the Reserve Bank Act, which was proposed in parliament in 1959. The Reserve Bank acts as the central bank of Australia, and manages the monetary policy in the country. The roles of the bank include stabilizing prices, guarding the welfare of citizens, printing and issuing money, and creating full employment level in the country. The government, on the other hand, utilizes fiscal policies to ensure the economy grows at stable rates. The Reserve Bank and the government have ensured stability in the economy of Australia using fiscal and monetary policies since November 2011. The fiscal policy is in form of taxation and government spending; while the monetary regulation is in form of the cash rate and open market operations. The government and the Reserve Bank have succeeded in stabilizing prices and economic growth through the policies. The bodies have not managed to achieve full employment and balance of payment. Performance of the Australian Government and the Reserve Bank in running the economy from November 2011 to November 2013 Price Stability Price stability is achieved when the annual rate of inflation in a country is zero. However, it is hard for a country to achieve a zero rate of inflation because of price and wage rigidities. Price and wage rigidities refer to those charges that do not decrease below certain levels, for example, salaries of executive officers in organizations. The Reserve Bank of Australia set an inflation target of two to three percent (Reserve Bank of Australia, 2013); after taking into account price rigidities in the economy in 2010. Other countries that target the same figure include Hungary, Mexico, Spain, Japan, and Canada among others. This means that the rate that Australia set is favorable and it is widely accepted in the world. The Reserve Bank set the low inflation rate target to avoid the undesirable consequences of high rates of price instability, which include uncertainty, unfair distribution of wealth, and increasing tax benefits for businesses (Reserve Bank of Australia, 2013). These effects, consequently lead to low annual economic growth rate. The bank has managed to maintain the target inflation rate since November 2011. Year January -March April-June July-September October-December Annual 2013 2.5% 2.4% 2012 1.6% 1.2% 2% 2.2% 1.7% 2011 3.3% 3.5% 3.4% 3% 3.3% Quarterly inflation rates since January 2011. (http://www.rateinflation.com/inflation-rate/australia-historical-inflation-rate) The above figures show the rates of inflation in Australia since January 2011. The study, however, aims at determining the average rates from November 2011 to 2013. These include all the quarters of 2013 and 2012, and the last section of 2011 whose rate was 3%. The rate has remained within the 2-3% range in all the relevant quarters of the study. This means that the Reserve Bank has managed to stabilize prices in the country by use of monetary policies. Unemployment Unemployment is the inability of a qualified person to fail to secure a job at the prevailing wage rates. The unemployed people are willing to take jobs at the given wage rates, but they fail to find jobs in the market. Unemployment leads to undesirable consequences in the economy, for example, it lowers the per capita income, increases dependency, and leads to theft and prostitution among others. The government and the Reserve Bank have failed to ensure low rates of unemployment in the country since 2011 because of the instability of some sectors in the economy. Long term unemployment has remained above 5% in the country since October 2011; whereas the velocity was below that amount before this period (Chua, 2013). This means that the management of unemployment has been inefficient, and this pulls down the economic growth rate. The inefficiency has been high, and it has led to a 5.8% unemployment rate in August 2013. Analysts argue that this rate is the highest the country has experienced since 2009 (Chua, 2013). This means that the government and the central bank need to create new policies to reduce the high long term unemployment rates in the country. This will in turn increase the Gross Domestic Product of the country. Australian unemployment rate. (http://www.forexnews.com/blog/2013/07/10/australian-unemployment-rate/) The unemployment rate is found by dividing the number of unemployed people by the total labor force in the country. Gross Domestic Product The Gross Domestic Product of a country refers to the total output produced in a country in a certain period (Arnold, 2011). The GDP of a country is calculated annually, and it helps in computing economic growth. Economic growth is computed by finding the difference in GDP of two years and dividing the difference by the total output of the base year. The government and Reserve Bank policies have managed to ensure that the economy grows at an increasing rate since 2011. The growth rate of the country was 2.4 in 2011, and 3.4 in 2012 (World Bank 2013). The Australian Bureaus of statistics argues that the country has maintained an upward economic growth rate since the last two decades (Australia, 2013). The service sector contributes 68% of the output in the country, and this represents the highest contribution to the national output. This means that the service sector is the most efficient and stable in the country. The growth rate of the country has slowed down in 2013. In the first quarter, the growth rate was 0.5%; while in the second section, GDP increased by 0.6 % (World Bank, 2013). The Reserve Bank postulates that the economic growth rate of the country may slow down by the end of the year. An occurrence of this forecast will decrease the velocity of GDP in 2013 (Australia Government, 2013). Year Jan-Mar Apr-June July-Sep Oct-Nov Annual 2013 0.5% 0.6% 2012 1.4% 0.5% 0.8% 0.7% 3.4% 2011 0.3% 0.3% 1.2% 0.6% 2.4% Quarterly economic growth rates of Australia from 2011 to 2013 Balance of Payment The balance of payment refers to the difference between a country’s exports and imports (Arnold, 2011). This difference is indicates in the current account. A positive difference means that the balance of payment if favorable; while a negative equilibrium refers to an unfavorable Bop. Australia has experienced an unfavorable balance of payment from 2011 to 2013. This has been the trend of Bop in the country in the last seventeen years (OECD, 2013). The low exports of the country that result from a poor manufacturing sector leads to the unfavorable Bop. The undesirable balance also arises because the country relies on the service sector, which does not include any exports. The deficit in the balance of payment ranges from -9,000 to -15,000 from November 2011 to 2013 (World Bank, 2013). The deficit has been decreasing from 2012 to 2013; this means that the government and the Reserve Bank are adopting efficient policies to manage international trade. Australian current account (http://www.tradingeconomics.com/australia/current-account) Evaluation of macroeconomic Policies used by Australian Government and the Reserve Bank Demand Side Policies Demand management policies are the regulations that the government and the Reserve Bank use to ensure that consumers demand goods and money at acceptable rates (Arnold, 2011). The policies are such that they can be altered to encourage or discourage demand. The government formulates fiscal policies while the Reserve Bank manages monetary policies. These policies aim at reducing the rate of inflation in the economy. The Reserve Bank uses the cash rate as one of the policies of managing the demand for funds in the economy. The cash rate is the cost charged on overnight loans, and it affects other interest rate in the economy (Reserve Bank of Australia, 2013). This means that the cash rate is the main item of controlling the cost of borrowing in the economy. The Bank lowers cash rate when it wants to encourage borrowing in the financial markets. On the other hand, the bank increases the cash rate when it wants to discourage borrowing and reduce money supply in the economy. The use of the cash rate results to efficient management of demand for funds. This is because the rate is determined by the market demand and supply for overnight loans. The Reserve Bank, however, does not have total control over the cash rate. This means that the Bank may fail to achieve desired results when the market forces lead to an undesirable rate. An example of this occurred in July 2013 when the government failed to stimulate demand (Business day, 2013). Consumer demand for goods failed to increase even after the government lowered the cash rate to 2.75%. The Reserve Bank also uses quantitative easing to manage demand for money. Quantitative easing takes place in the open market operations where the Bank sells state securities to the market. The Reserve Bank sells government bonds when it wants to increase money supply and stimulate demand. On the other hand, the Bank buys the securities in the open market to reduce demand and money supply in the market (OECD, 2013). The policy succeeds in reducing and increasing money supply in the economy when desired. This helps in maintaining annual inflation rates at between 2 to 3%. Quantitative easing, on the other hand, has failed to achieve the total desired outcomes in Australia. The policy has led to persistent balance of payment deficit in the country for almost two decades (Australia, 2013). This decreases the economic growth of the country, and it increases government debts. The Australian government manages demand by use of fiscal policy. Government expenditure is the main fiscal policy that affects demand directly. The expenditure may be in form of purchasing goods from local producers or investment in public projects (Fishback, 2012). The state increases spending when encouraging the citizens to increase their demand, and it decreases expenditure when discouraging demand. The government also uses taxes to stimulate demand in the economy. This policy is effective in that it discourages the consumption of highly taxed commodities. This is because taxation of goods increases their price. Consumers act according to the law of demand when price increases by reducing their demand. This means that fiscal policy is effective in managing demand. This has given rise to the stability of the Australian economy since November 2011 to 2013 (Australia Government, 2013). This has consequently contributed to the high economic growth rate of the county. Supply Side Policies The supply side policies are those that affect the availability of goods in the market, for example, taxation, production benefits that are in the form of subsidies, and aggravate supply. The state taxes goods at the production point in order to encourage or discourage their production. The type of taxation depends on the outcome that the government wishes to achieve. The state reduces corporate taxes to promote investment. The government does this also to encourage firms to undertake research and development projects (Fishback, 2012). The increase in investment and research leads to new techniques of producing goods and services. This in turn increases the supply of the goods and services in the economy (OECD, 2013). The government also lowers personal taxes to encourage employment of more people in the labor market. This also encourages the existing workers to continue working in the labor market at the existing wage rates. The Gross Domestic Product of the county increases as a result of this policy, and this means that it is efficient (Australia Government, 2013). The state also increases benefits such as subsidies and transfer payments in order to encourage the production of certain goods. An example of subsidy is fertilizer in the agriculture industry. These benefits increase the national output, and this leads to high economic growth rate in Australia. The Australian government has invested in education since 2011. The investment project is known as future benefit, and it encourages international and national students to study in Australia. Andrew Robb introduced the future benefit competition, which tests students understanding of their education through practical tests. Winners of the competition are provided with tuition fees and numerous gifts (OECD, 2013). The investment in education boosted the economic growth of the country from 2.4% in 2011 to 3.4% in 2012. Another fiscal policy that the Australian government has undertaken since 2011 is investment in renewable energy. The energy was in form of wind, geothermal, solar, and bio-energy. The renewable energy contributed to the production of 13.14% of the output of the country. This also means that the investment contributed to the growth of the economy in 2012. The contribution of the energy to the production of output means that the policy was efficient. Conclusion The government and Reserve Bank of Australia are the main policy making bodies in the country. The government makes fiscal policies while the Reserve Bank formulates monetary policy. The two have succeeded in stabilizing the prices and economic growth rates of the country. Taxation, cash rate, open market operations, education and energy projects are the major policies that have enhanced the stability. The fiscal and monetary policies have failed to achieve balance of payment equilibrium and full employment level. This means that the state and the Reserve Bank need to revise existing employment and international trade policies. The revision of the strategies will stabilize the Australian macro economy by maintaining low rates of inflation, full employment level, favorable balance of payment, and upward trending economic growth rate. Australia will become a developed country by achieving this status. Bibliography Arnold, R. A., 2011. Principles of macroeconomics. Australia: South-Western Cengage Learning. Australia : Consumer price index - march quarter 2013, 2013. MENA Report 1(1), pp.1-24. Australia Government, 2013. Overview of fiscal position. Australia government [Online]. Available at [Accessed 21 October 2013]. Business Day, 2013. RBA statement on monetary policy. RBA statement on monetarypolicy [online] available at :< http://www.smh.com.au/business/rba-statement-on-monetary-policy-20130402-2h4fs.html> [Accessed 21 October 2013]. chua, I., 2013. Australia jobless rate seen steady at 4-year high in September. Reuters, [Online]. Available at < http://www.reuters.com/article/2013/10/08/us-economy-australia-jobs-idUSBRE99703E20131008 > [Accessed 21 October 2013]. Fishback, P. V., 2012. Relief during the Great Depression in Australia and America. Australian Economic History Review, 52, (3), pp. 221-249. OECD, 2013. OECD Economic Surveys. Paris: OECD Publisher. Reserve Bank of Australia, 2013. Inflation target. Reserve bank of Australia, [Online]. Available at < http://www.rba.gov.au/monetary-policy/inflation-target.html> [Accessed 21 October 2013]. World Bank, 2013. GDP growth (annual %). World Bank, [Online]. Available at [Accessed 21 October 2013]. Read More