The Study of Australian Economic - Assignment Example

Name Course Tutor Date Question 1 Australia is second to the United States of America as far as the G7 countries living standards are concerned. The economy has undergone a lot of reforms that has seen the country stand against the wiles of recession experienced worldwide. Asia forms a large market of the Australia manufactured goods and the signing of many contracts between her and China is a major boost to supplementing raw materials and energy supply which is crucial to the growth of the economy (Garnett and Lewis 2002). Commencing in 1980, Australia has major structural changes in its economy and has overtime and progressively change from being highly protected, in-ward looking and regulated to export oriented, open and internationally competitive. The following table shows the GDP growth rate posted for a period of four years from January 2006 to January 2010. Major economic reforms comprised of floating the Australian dollar,reduction in high tariffs and protective impediments to free trade, increase in flexibility in the labour market ,increase of efficiency the federal and state branches of government, deregulating the financial service sector, reforming the taxation system, reduction in income tax rates,introduction of a broad-based goods and service tax and the privatisation of many government owned monopolicies. The Australian economy is largely dependant on the service sector. Mining and agricultural sector forms the bulk of Australia exports. Australia has a competive advantage in the exportation of primary products. The table below shows the share of the service sector as compared to others (Garnett and Lewis 2002). 1974 1984 1994 2002 Agriculture 4.4 4.3 3.0 2.7 Manufacturing 18.1 15.2 13.3 11.8 Other industries 14.2 14.0 14.6 14.4 services 63.4 66.4 69.1 71.1 The softening of the Australian economy in the twenthiet centuary is largely atributed to Asian economic crisis that transpired between mid 1997 to 1999, although the recession largely affected Asia, Australia was an indirect victim because much of its products lant in the Asian market. Despite these positive implications relating to the Australian economy there has been a share of challenges that has been a great obstacle to its growth. The population composition is majorly made up of the old people who are not productive as far as the economic growth is concerned. It is disterbing to note that a large percentage of the able population is affected by mental illness. The research findings carried out by Nation Survey of Mental Health and Wellbeing showed that the percentage of those affected was approximately 3.2 per cent. The commodity prices peaked in 2008 contributing to a drop in spot prices of coal and iron. Importers of Australian goods reduced their importation. The decreasing domestic tourism and a flat inbound has affected hospitality and tourism sectors. The fact that the Australian labour force is largely supplied by immigrants, attracting them to the rural areas is a big challenge because most of them dwell in towns and do not want to move to the rural areas. Moreover the Australian government has to devise ways of curbing the effects of drought since Australia is a drought prone country. Water management measures have to be applied to try and overcome this problem. The slowing economy was meant to be jump started by the reduction of interest rates an initiative taken by the Reserve Bank of Australia. The first quarter saw the Australia economy expand at the weakest pace as compared to the previous quarter. A mere 2.7 per cent growth in Gross Domestic Product and 0.3 general growths in the economy were registered. The inflation rate in September in 2008 was five per cent. The government was determined to expediently solve problems the preceded the economic meltdown. It guaranteed obligations of whole sale debt of Australian foreign bank branches and Australia deposit-taker commercially. It ensured general guarantee on deposit. A stimulus package of $10.4billion was declared whose value was equivalent to 0.9 per cent of the Gross Domestic Product. The economic stimulus was proposed to go on through to 2010. The federal and state government woke up to the importance of investing in water, transport, education infrastructure, and ports to help expand the ability of Australia tom export. Question 2 The monetary policy is a vital instrument that is employed in dealing with many of microeconmics problems that come up in the economy. The monetary policy was made strong the successful floating of exchange rates that was used in Australia as far back as December 1983. Fiscal policy is not applied in Ausralia because of its ineffectiveness. Consequently macroeconomic policy is the way to go. The targes set out by the macroeconomic policy include checking inflation, stabilisation of economic growth, dealing with unemployment, and ensuring balance of payment. There are tools of macroeconomic policy that are used during long periods of low growth, unemployment, minimum wages, high rates of inflation and unstable prices. The foating exchange rare is one intrument of macroeconomic policy used for attainment of macroeconomic goals. Sustaining the economic growth within a short period of time is made possible by the macroeconomic policy because interest rates influence the rate at which individuals or corporate organizations invest in the economy. Interest rate is used in the short term period to influence the economy positively. Its main aim is to stabilize inflation and demand within a medium term and expectation of inflationary and to attain the administrative objectives of underlying inflation ranging from about two per cent to three per cent that can allow sustainable growth. Despite being commonly used as an effective tool in the monetary policy, interest rates floating have their own share of disadvantages that come with them. According to Otto (2007).They can result into the exchange rate being unstable and may fall short of establishing the applicable new equilibrium following an external infringement. It is crucial to keep the inflation rate low at a range of two to three per cent for the government to achieve its economic goals (56). The government cannot achieve ensuring low levels of unemployment and realizing a sustainable growth without it. The government stimulates and triggers growth in the short run by spending more on internal planned projects. Prolonged period of time or in the long run makes problems of inflationary associated with the policy to come up. This consequently emphasizes why this instrument should made use of in the short term periods. A floating exchange rate makes local monetary policy stronger in comparison to the domestic activities. Within the selected target range the possible desired growth should be attained. The policy can also be used as an electioneering instrument as opposed to the provision of the exact guidance of the economy. The act of regulating the amount of money supplied so as to keep production, employment, and prices stable. With reduction in interest rates people are motivated to invest and it result into low unemployment levels being achieved. Borrowing is encouraged at the expanse of saving (Otto 56). During inflation it is better for the Australian dollar to be strong to allow interest rates to be slashed without negatively influencing the exchange rate. The event of cutting back on spending and raising tax rates make the government avoid deficit in balance of payments. Market demand for goods and services will decline in the short run resulting in the stagnation in the growth of the economy. To moderate the economy ensures stability and precedes business expansion. If the government spending was to be slashed this will result into unemployment in the short term period as jobs initially created by increased spending inadvertently disappear. Question 3 The goals of macroeconomic policy include attainment of low rates of unemployment , stabilty of prices and the economy, low rates of inflation that can sustain a significant economic growth, full employment, amd balance of payments. Macroeconomic policy employ the interest as a crucial tool. The domestic interest is compared to the international or the global interest rate. A low domestic interest rate as compared to the global interest rate will motivate investors to come and invest their money. High interest rates will keep away investors from venturing into that particular market due to low rate of returns linked to it. It makes raising capital from loan term loans from banks a very risky venture as the profits are not guaranteed. If the interest rate is raised above the global interest rate the investors are bound to close up their business venture and relocate to countries that are more accommodating than the current one. The turnover of borrowing will regulate how much oney the financial institutions will avail for borrowing by the investors. The macroeconomic make use of the short run and long run analysis. There are measures that can only be undertaken to stabilize the economy in the short run. All governments have a blueprint of the long term economic goals that are stipulated in various strategic plans. Decreasing imports and increasing cannot be used to reduce the problem of balance of payments in the short term period. This goal will come with its own share of sacrifice in the economy. It must be made real with industrial revolution to ensure that a country produces its own goods without relying solely on importing. Devaluation of the local currency can be used in the short run to solve the problem. Low levels of investments are characterised by high levels of unemployment. Many able bodied people are willing to work but there are no jobs. Being idle can make people resolve to crime as a means of living. This will in turn chase away foreign investors who will consider the country a dangerous place to live in and start business. Full employment cannot be achieved in spite of it being a major goal of macroeconomics, for any situation to permit economic growth there must a certain level of unemployment. If full employment is attained then they will be no economic growth to sustain employment. Gordon and Valentine argues that Macroeconomic policy stem from the reasoning of the post-classical economist called John Keynes who clearly outlined the need and importance of government intervention or influence in the economy particularly in the bad times. He asserted that if we allowed self adjustments of the economic aggregates and in the long term this does not occur it may lead to the death of all of us. Consequently he explained that the government had the role of coming in if the situation could not be rectified by self adjustment. Macroeconomic policy stem from the reasoning of the post-classical economist called John Keynes who clearly outlined the need and importance of government intervention or influence in the economy particularly in the bad times (74). He asserted that if we allowed self adjustments of the economic aggregates and in the long term this does not occur it may lead to the death of all of us. Consequently he explained that the government had the role of coming in if the situation could not be rectified by self adjustment Increasing exports and decreasing imports cannot be applied to alleviate the problem of balance of payment in the short run. This goal will come with its own share of sacrifice in the economy. It must be actualised with development in the manufacturing industry to ensure that a country produces its own goods without relying heavily on importing. But a measure such as devaluation of the local currency can be applicable in the short run if at all it can assist in solving the existing problem. When the level of unemployment is high the rate of investment is low. Unemployment will create insecurity as many idle people have the capacity to work but cannot find a job. The idle people can resolve to turn to crime as the only thing to make ends meet. The Australia dollar is strong as compared to other currencies of the world because of increase in export commodities. This makes the Australian dollar gain ground as compared to other currencies. To curb the problem of inadequate labour force, Australia has allowed immigrants to come in and offer their services. Australia has huge natural resources that are exploited and beautiful coastlines that attract tourist who bring in foreign currency thus ensuring Balance of Payment. Macroeconomic policy stem from the reasoning of the post-classical economist called John Keynes who clearly outlined the need and importance of government intervention or influence in the economy particularly in the bad times (Gordon and Valentine 23) Works Cited Garnett, A. And Lewis, P. (2002). The Economy’ ,in Aulich, C. And Wettenhall R. (eds), Howard’s Fourth Term , New South Wales University Press Sydney. Otto ,G. (2007). Central Bank Operating Procedures : How the RBA Achieves Its Target for the Cash Rate’ , Australian Economic Review; June, Vol. 40 Issue 2, p216-224 . Gordon, C. And Valentine, T. (2009), Economics in Focus: The Global Financial Crisis, Pearson Education, NSW. Read More