Australia's Terms of Trade - Coursework Example

College Introduction Australia’s goods and service produced have been consistently increasing from long ago in the 19th centuries. This growth in the internal economy has improved the quality of life of the Australian people. Economic growth however is not very smooth but rather fluctuating from time to time. This fluctuation as always measured by GDP in Australia is referred to as business cycles. Business cycle is often unpredictable most of the times. Economic crisis many a times are not foreseen and it is always very difficult for economist to tell when the economy is at peak and when at the rock bottom. A In the past few years a disaster struck part of Asia countries and it also reduce Australia’s economic growth in early 2011. Combined, these natural disasters detracted around 75%of a percentage point from Australia’s economic growth in 2010-11, the real GDP contracted in the March quarter of that year. The affected sector took time to recover from the disaster and therefore making it harder for Australia to recover as well, with the resumption of activity and commencement of reconstruction that added to real GDP growth from 2011-12 (Australia’s central bank. 2012). There have been major changes in term of both structure and trend in Australian trade. Structural change has been going on from as far as 19th centuries and it is not new to anyone. It is one of the ongoing features of Australian economies. In the past years one of the most common changes is that of the service sector, this sector make up the greater part of both employment as well as output in the recent years. In the early years of 1950s more than of the Australian workforce were employed in the service sector, currently the rate stood at over 75% and the trend seems to be increasing (Takeda, 2007). On the contrary the workforce working in both manufacturing and agricultural sector has steadily declined. The Government of Australia is taking back the budget to surplus in 2012-13, despite a challenging world wide economy that has had great impact on tax receipts. Taking economy back to surplus is good given current economic situations, economy is expected to grow, the unemployment rate is expected not to grow and the prices of goods remaining expensive as it has been historically. Going back to surplus, make it possible to make the ongoing scope in monetary policy to respond to economic developments and supports confidence in Australia’s public finances at a time of global economic difficulty. Growth in the global economy is expected to be lower than forecasted in the Australian budget, as the recession in the euro area and the overcome recovery in the United States having effect across the countries of Asia that are Australia’s trading partners. China economy has done well more than expected in the recent year and as per the forecasters it showed that the demand in external economies is low and some policies are weakening domestic economies. The dept woes that have roped Europe region and the current battle of fiscal cliff in the United States with both democrats and republicans failing to agree on the way forward have left a lot of uncertainties in the global market (Peter, Christopher, and Australian National University. Centre for Economic Policy Research. 2008). B The effect of decline in Australia terms of trade means lesser income for the people and consumption will go down. Consumption is the amount both household and individual spends on goods and services. It includes expenditure on items such as food, clothing and consumer durables and services. The much one spend on commodities at any given time and price level is sometimes determined by many factors but key among those factors is the level of income one is earning. The more one earn the more likely is willing to spend. In the common model of consumption it is taken that the amount an individual spends on consumer goods is dictated by their level of disposable income. The more the disposable income the more the level of planned consumption. Income is directly related to consumption. However, people do not generally intend to spend all their income, they also plan to save some. This implies that whilst consumption increases as income increases it will usually be by a lesser amount and it is so in Australia. Due to decline in terms of trade the household saving ratio is now around 9 per cent of disposable household income in Australia. Since the global crisis, the rate has been steadily around 10 percent. For the economy to continue its growth at the same time keeping saving public spending, private investment has to increase as well as net exports. Clearly, the contribution from private investment is going down, also what is expected from exports in the recent is no quite promising. Despite the move by the government to postulate that it is working on a fiscal policy that the much of growth is coming from its consumption and spending. This implies that the current budget deficit doing the work that it should not have because it ought to play a role only in monetary. This is upholding the GDP growth as it works towards restoring the household’s ability to save through credit facilities. Currently a lot of depth is sitting on the household and this is what push the economy into much cried about crisis we are unlikely to move back to those years that saving ratios were record. This also implies that if the private sector slowed on growth and government come to its sense of what it should do on austerity then the individuals firms and individual household will be greatly affected by national income drop and their saving quest affected. Hours worked grew while real GDP didn’t. The data in Australia as of today give some hint that is a reflection for policy makers who are demanding for major reduction in public general spending, the public sector contribution to growth is 0.5% (Peter, Christopher, and Australian National University. Centre for Economic Policy Research. 2008). If it was not for the boost the general growth would have been low. The June quarter data combined with the official data available tells us that the economy is still growing but well below trend and there will not be any significant dents in the high levels of labor underutilization that are persisting. China economy is currently stagnant and the terms of trade going down in the next period, it is now certain that the top of commodity prices is over and it will definitely have effect on the foreseen investments but it is not clear how it will impact. But it is obvious that investment will weaken.  Real GDP rose by only 1.4% over the past year, while employment was almost stag in early 2011, with unemployment improving slightly. These two things were occurring due to the plays within monetary and fiscal policy. These policies are set to offset the expansionary effects of the resources boom. The persistence in uncertainty about the world economy further complicates the issue. The rising exchange rate since 2003, plus the rise of China and other low cost countries and downturn in the global economy, has placed trade‐exposed non‐resource firms in Australia under constant competitive pressure. With regard To this and other factors, the actual trade balance on goods and services as a share of total domestic demand has fallen from +11.9% in the June quarter of 2001 to ‐3.1% in the same quarter of 2011. however, it has been the second round of the exchange rise after the GFC that has solidify pressure on manufacturing and service industries, partly because it has been combined with weak economic Conditions in the USA and the EU and because longer term decisions are being taken as the $A becomes entrenched. for example in manufacturing, real gross value rose by 1.5% per annum between the second quarters of 2003 and 2008, but has dropped by 1.6% per annum over the three years to the June quarter of 2011. As a result, while manufacturing employment rose in the earlier period t has fallen by 10.2% in the three years to August 2011 (IMF, 2012). Similarly, real service exports rose up to early 2008, but have fallen steadily since then, and imports of services have grown rapidly in recent years. As a result the real trade position in services, positive before 2005 and balanced after the GFC, has moved to a deficit of about 2% of domestic final demand by the June quarter of 2011. This reflects a decline in the number of foreign students coming to Australia and a dramatic change in net short‐term population movements, as residents departing now far outnumber visitors arriving. C (Australia’s central bank. 2012) Monetary policy ‘have not been very assertive’, as per the reserve it is being targeted to reduce the perceived expansionary effect of the resources boom In factual both of these concerns are no longer relevant, the first for the reasons outlined above and the second because it is clear that there is now no inflationary problem in Australia that needs to be addressed by a restrictive monetary policy. Fiscal policy is currently much restrictive, with the Australian Government currently on one of the fiscal process that is more intense for over 40 years.  The Government is currentlyproposing to take over 3% of GDP out of the economy over 2011‐12 and 2012‐13. However none of these considerations is of any help to Australia’s economy because of its unique nature. The ongoing issues within the European economies is showing that the general Australian is not good and it is not as was presented in May in the 2011‐12  Conclusion Australia is one of the top worlds rich economies at bar with most of the countries in Europe. Australia per capita GDP is ranked 5th in the world above countries like England and France. Australia’s unemployment is around 5% figure which is quite good especially in light of current economic crisis that have caused economic turmoil across majority of worlds top economies. However the world economic crisis dint spares Australia. The crisis hit hard most of the European Union countries which are trade partners with Australia hence sending ripples across both Europe and Asian economies. This crisis has caused a great decline in the terms of trade in the Australian economies. The government of Australia has to act quickly to restructure its financial institutions in order to avert similar crisis in the future. References Annual Report 2012. 2012. Available at http://web.worldbank.org/WBSITE/EXTERNAL/EXTABOUTUS/EXTANNREP/EXTANNREP2012/0,,menuPK:8784414~pagePK:64168427~piPK:64168435~theSitePK:8784409,00.htm Australia’s central bank. 2012. Available at http://www.rba.gov.au/ IMF Adopts Institutional View on Capital Flows. 2012. International monetary fund. http://www.imf.org/external/index.htm Australian Social Trends. 2012. Available at http://www.abs.gov.au/. Peter J. S, Christopher W. M, and Australian National University. Centre for Economic Policy Research. 2008. Monetary policy in Australia: the conflict between short-term and medium-term objectives. Sydney: Australian National University, Centre for Economic Policy Research. Takeda, M. 2007. Australia: 2007 Article IV Consultation-Staff Report; Staff Supplement; and Public Information Notice on the Executive Board Discussion. New York: International Monetary Fund Read More