Economic Issues and Growth in Australia - Literature review Example

Heading: Economic Issue Your name: Course name: Professors’ name: Date Introduction Australia is part of the nations globally that have faced both strong and weak economic times. This paper focuses on the country’s current experiences that include economic growth, inflation, unemployment, external stability, CAD, income distribution, ecological sustainability, two speed economy, and resource allocation, allocative efficiency, income distribution, and opportunity cost. Economic Growth According to Gilding (2005, pp. 25-27), in the last two decades, Australia suffered the greatest economic contraction that was caused by various factors. One of them is the floods that affected resource exports in the key coal-producing area. This incident had adverse effects on the country in that it exposed its dependence on mining revenue. As a result, its Gross Domestic Production (GDP) went down to 1.2% for the first three months from the earlier quarter that had 0.8% growth. Then, the country depended on the mining, agriculture, and manufacturing. Because of economic decline of Mining by 6.1%, agriculture by 8.9%, and manufacturing by 2.4%, its GDP collapsed by 0.2 points (Sabillon, 2008, pp. 12-15). However, presently, the country is one of the best economies among the developing countries worldwide. For the past seventeen years, it has recorded a steady economic growth that averages to 3.3% per year. Therefore, this has placed the country on top in terms of high economic growth. The country’s economic growth was forecast to increase in 2008 and 2009 by 2.75%. This growth rate is stunning in that it is above 2.2%, which is the average economic growth rate among members of the Organization of Economic Cooperation and Development (OECD). In addition, the country is ranked as the leading nation in the Asia-Pacific area of industrial productivity, agriculture, and labor per an employee. In fact, the economic survey by the OECD conducted in 2006 indicates that the country has the highest living standards compared to the members after the United States (Stapledon, 2009, pp. 45-47). Furthermore, Australian economy has an advanced, current economy with a GDP of US$1.23 trillion. In 2011, the country was ranked the 13th leading economy by nominal GDP. It was also rated the 19th significant importer and 19th leading exporter. It is a member of the free trade agreements of New Zealand, Thailand, Singapore, Chile, and United States. Its economic is also controlled by service sector that represents 68% of its GDP. Here, the mining and agricultural sectors that have 10% GPD contribute to the country’s 68% total exports. In fact, its GDP is higher than the UK, France, and Germany in relation to purchasing power parity. According to Sabillon (2008, pp. 12-15), one ne of the causes of its economic growth is its strong fiscal position. Its budget surpluses are instrumental in the allowing Australian Government and other governments to settle its debts. Between 2005 and 2006, the country’s debt was eliminated; hence making it a net creditor state. In fact, in 2008, the government committed to a surplus of 1.8% of GDP. Moreover, the Reserve Bank of Australia (RBA) is in charge of the monetary policy that handles consumer price inflation existing between 2-3% averagely. In addition, the country has practical and sound institutions and financial regulations structure that offers certainty for business. This structure is also open to investment without any delays. Other factors that influence Australian economic growth are the presence of insolvency regimes, business-oriented rules, and a powerful, open, commercial governance system (Sabillon, 2008, pp. 12-15). Besides, the country’s steady economic growth is facilitated by few barriers to investment and trade. This is achieved through the advancements made in telecommunications, transport, gas, and electricity (Gilding, 2005, pp. 25-27). According to Gilding (2005, pp. 25-27), World Bank says that it would only take two days to start a business contrary to the OECD members that would take 20 days. This economic success is further propelled by the Australian value-added tax that applies to most services and goods across the economy and is charged at 10%. There is also a 30% flat corporate tax and no stamp duty charged on share transactions. Because of the stretch on its infrastructure, the country came up with an organization in 2008 referred to as Infrastructure Australia’ charged with the provision of a new planning, funding and implementation approach of the infrastructural needs (Sabillon, 2008, pp. 12-15). Therefore, the country remains stable, safe, and prosperous nation that attracts regional and global investment and operations. Inflation According to Goncalves & Carvalho (2009, pp.24-28, inflation refers to the general rise of prices of commodities while the purchasing power falls for a certain time. This happens due to a higher supply of money. This implies that each currency unit can purchase few goods and services. There are crucial measures of inflation in economics that include inflation rate, which is a yearly proportion of consumer price index over time. Moreover, inflation can be measured by the producer price indices (PPIs) that determine the average price changes experienced by local producers to their production. Another measure of inflation is the commodity price indices that determine prices of selected commodities. Core price indices also help in the measure of volatile commodities, such as, oil and food prices. In addition, GDP deflator is another appropriate measure of inflation especially when determining prices of all services and goods in the GDP. Asset price inflation is also instrumental in the measure of financial or real assets, such as real estate and stock (Goncalves, & Carvalho, 2009, pp. 24-28). As stated by Cleary (2011, pp. 23-25), the inflation rate has been reported to be on the rise, in the second quarter of 2011, by 3.6% in Australia. Statistics show that since 1937 to 2010, the country’s inflation rate was 6.02%, and it hit a historical high of 17.60% in 1975, and a low of -0.30% in 1997 (). According to the reports released in June, 2011, the consumer price index in Australia was a 178.3% in the second quarter of the year. The yearly inflation rate was at 3.60265 compared to 3.3333% of the previous quarter. In fact, between March and June, 2011, there was an inflation rate of 0.9055%, an indication of a quarter to quarter inflation rate (Cleary, 2011, pp. 23-25). Clearly, the most notable price increases this quarter include automotive fuel by 4.0%; fruit by 26.9%; furniture by 6.o%; hospital and medical services by 3.4%; loan and deposit facilities by 2.1%. On the contrary, the most notable price decreases include electricity by 1.5%; milk by 4.6%; vegetables by 10.3%; accommodation and local travel by 1.5%; and visual, audio computing equipment by 6.3%. The rise in fruit prices by 26.9% in the second quarter of 2011 was majorly caused by an increase of 138% of banana prices. The increase resulted from a shortage caused by Cyclone Yasi that took place around that time (Cleary, 2011, pp. 23-25). Over that duration, the prices went up to 470% till June, 2011. Nevertheless, the RBA expects that the country will maintain its economic growth once it has totally recovered from the natural disasters, such as, Yasi Cyclone. Unemployment At present, in the Australian society, unemployment refers to joblessness among persons over 15 years who have not undertaken any salaried work for some time. Long term employment, on the other hand, refers to state of joblessness that has lasted for over 52 weeks (Song & Freebairn, 2005). According to the International Labor Organization (ILO), unemployed persons are those that are presently not working, but they are available and willing to work for pay, and have searched for jobs. On contrast, the OECD defines unemployment rate as the total number of unemployed people as a proportion of the work force. Presently, the country’s unemployment rate has fallen from 5.2% to 5.0%. This is the lowest rate ever since January 2009, a period in which the country was handling the effects of the international financial crisis. According to the Australian Bureau of Statistics, the work force figures point out that only 11, 417, 400 citizens are employed. Moreover, it records that, in the past year, 364,000 job opportunities were created, with 80% of them as full time. In December, 2010, Australia recorded a total of 2,300 jobs. Most important, unemployment rate dropped by 25,400; therefore, for the first time, it is below 600,000 since the beginning of 2010. In terms of the participation rate, there is a slight decrease from 66.0% to 65.8%. Since the introduction of the labor office, there are 716, 000 jobs that have created in the country. These statistics are, therefore, an indication that the country’s economy is still strong in that it has effectively managed to recover from the effects of the worldwide financial crisis (Song & Freebairn, 2005). In fact, the country is rated to have the lowest unemployment rate among the industrialized countries (Song & Freebairn, 2005). For instance, its unemployment rate is 0.5% compared to United States’ rate of 9.45; United Kingdom’s 7.8%; France’s 9.8%; and Canada’s 7.6 %. However, in August, 2011, the country has recorded an unexpected rise in the unemployment rate from 5.1% in July to 5.3% in August, 2011. This might have resulted from 12, 600 full-time jobs that were removed for the economy in August, went down to 8.035 million. On contrast, part-time jobs had risen to 2900 to 3.398 million. More so, Song & Freebairn (2005, pp.54-60) argues that the rise in the unemployment rate is caused by the strength of the Australian Dollar that, in turn, has negative effects on manufacturers, and internal tourism. It was also caused by the tough international markets. In addition, there are weakening domestic conditions with the retail sales and consumer sentiment reduced due to renewed worldwide crisis on debt doubts in Europe and United States. Moreover, there is a soft housing market in the country. Therefore, the current unemployment rate is expected to remain high for the rest quarter of the year because of the high inflation rate that the country is experiencing. External stability and CAD External stability refers to a condition under which Australian economy can meet its global financial commitments (Toner, 2010, pp. 35-37). There are various factors that affect a country’s ability to realize these commitments. Therefore, in the process of assessing a country’s external stability, the following measures are used. Firstly, there is the exchange rate, which refers to Australian’s currency value as expressed in other currencies. For instance, Australian’s currency is usually expressed in US dollar as it trades with it more than any other nation. Nevertheless, the country has another measure referred to as Trade weighted Index that determines changes of its currency value against those of its other business partners. Secondly, Gross Foreign Debt is another measure of external stability. This entails the total amount owed to organizations located overseas. On the other hand, Net Foreign Debt is equivalent to all debt less any other lending to foreigners by Australians (Toner, 2010, pp. 35-37). Therefore, most of the Australian, global debt is held by banks, with a small percentage by different governmental levels. Thirdly, the Current Account Deficit (CAD) refers to a single fraction of the Balance of Payments (BOP). Australian country has run this account, an implication that it has it engages in more importation than exportations. The highest contributor to the CAD is the payments required to cover the interest on its Net Foreign Debt. Toner (2010, pp. 35-37) says that, in Australia, there are various demand factors that influence its external stability. One of these is the rise in the consumer confidence may lead to an increase in the total demand. However, services and goods might be imported in case local production does not meet this demand. As a result of making importations, the CAD enlarges. This might also result in the depreciation of the dollar; hence increased consumer confidence causes external instability in the country. For instance, in 2006-2007, high consumer confidence led to a high CAD of -5.9% of GDP, while, in 2008-2009, low consumer confidence led to a decline in the amount of imports in the country. On contrast, Buultjens (2005, pp. 60-65), the country’s external stability is also affected by improved economic activity among its trading partners. This, in turn, leads to an increase in the total demand. Nevertheless, this has an effect of increasing the amount of exports in the country. Increased exports create a demand for the Australian Dollar in the foreign exchange market; hence it may appreciate. Moreover, this improves the balance on the current account because of there will be more credits in the net services and net merchandise accounts. Therefore, external stability is crucial in the country’s economic growth. Business confidence also affects external stability in the same way as consumer confidence (Buultjens, 2005, pp.60-65). The more the increase in business confidence, the more expenses on imported commodities in the production process. Consequently, there is a likelihood of higher debits than credits. Interest rates also affect external stability because an alteration in the interest rates affects businesses and consumer spending patterns. For instance, in 2009, the recent appreciation of the Australian Dollar (AUD) against the US dollar caused difference in the interest rates. Even though, the Australian rates were decreased to 3% in 2009, US federal funds were lower than 0.5%. This gave room for the AUD to appreciate for US$0.65 in the initial quarter to more than US$0.90 at the end of the year. Additionally, foreign economic situations, and exchange rate influence Australian external stability and the CAD (Toner, 2010, pp. 35-37). Income Distribution and Resource Allocation In order to determine income distribution in the Australian economy, the use of the Gini Index is highly indispensable. This index measures the extent of inequality in the allocation of the family income in Australia (Saunders, 2007, pp. 34-40). It is calculated basing on the Lorenz curve whereby the total family income is plotted alongside the number of families from the poorest to the wealthiest. In the Gini index, at zero, people have the same income, while at 1.0; one person has all the income at the expense of everyone else. In Australia, the Gini coefficient has worsened form 1996-1997 0.296 to 0.309 in 2002-2003. This inequality of income distribution is facilitated by the widening gap between high and low income earners. Moreover, there is a gap between people employed and those that are unemployed (Headey, Marks, & Wooden, 2005, pp, 56-62). Most of the Australians receive their income from salaries, with the majority of the country’s income gained from a similar source. On the other hand, some of people’s income is from different occupations. Headey, Marks, & Wooden (2005, pp, 56-62) state that for a long time now, the Australian economy has had a large amount of involuntary unemployment. Many economic and government forecasters claim that this situation is not about to change for many years to come. With these facts, it is explicit that Australian income distribution will remain unbalanced till employment rate is drastically reduced (Saunders, 2007, pp. 34-40). On the other hand, Scott (2008, pp. 34-38) says that efficient resource distribution refers an economy’s ability to meet its responsibilities by ensuring that all the economic and social objectives are met without any waste. According to Saunders (2007, pp. 34-40), this aims at equal allocation of resources to the entire population in order to enhance living standards. Presently, in Australia, the target for efficiency about labor is 1.5-2.0% per year. Therefore, the Australian economy is effective in that it aims at equally allocating resources to all parts of the country. Ecological Sustainability Thomas (2005, pp.219-223) argues that, for the past 40,000 years, the country’s ecology has been sustained by the Aboriginal people. The struggle for resources and space has led to ecological destruction in the past two centuries. Currently, serious consequences of this on Australian biodiversity stimulate governmental and non-governmental institutions to handle Ecological Sustainable Development (ESD). In fact, the country has been rated among the world’s top twelve mega diverse nations. The country is responsible in that out of the twelve countries, it is the only one that has national wealth, degree of development and conservation and maintenance knowledge of its biodiversity. Being an island, it has a huge responsibility for this conservation and maintenance. In addition, the country’s reliance on farming and manufacture alongside medical developments makes its sustainability to be quite indispensable (Thomas, 2005, pp. 219-223). Some of the reasons for the country’s ecological sustainability are political, social, and economic culture in the country. Thomas (2005, pp. 219-223), says that this is caused by the concern for survival in a region that has gone through adverse effects of ozone depletion and ultraviolet radiation, especially over Halley Bay. Moreover, there is a significant weakening of land and high population along coastlines. In addition, there is suburban and commercial household waste that needs to be managed at the governmental, council, and community levels. Thomas (2005, pp. 219-223), ESD entails conservation of ecosystems for upcoming generations while its aims at meeting present economic needs. Being an industrialized country, Australia ought to take serious conservation measures in order to sustain its ecology. Opportunity cost According to Pigram (2006, pp. 89-93), opportunity cost refers to the highest value option forgone. Efficient market clearing price, equals opportunity cost of the services’ or goods’ marginal cost in the market. In addition, efficient prices demonstrated by markets provide market participants with the correct incentives to operate effectively lower their costs. The Australian economy is aiming at allocating prices in relation to the opportunity cost (Pigram, 2006, pp.89-93). Two Speed Economy This refers to an economic situation in which a section of people are rich while the other is poor. Pearse (2009, pp. 200-204) says that, in such a situation, the poor live differently from the rich people, and that the latter are highly independent on the government. This is because they have different parameters that affect their social and financial status. Moreover, this is a scenario that has the rich holding an independent economic policy. Nonetheless, the rich individuals in this case still fight for domestic resources with the poor in order to gain more wealth. This explains the widening gap between the rich and the poor in the country. Moreover, the government cannot control these individuals because they have reserved the domestic resources for their own interest (Pearse, 2009, pp. 200-204). In Australia, there are concerns that income from the boom result from mining-related industries, yet the rest of the nation is experiencing higher exchange and interest rates. According to Pearse (2009, pp. 200-204), statistics show that there is a difference in employment and output between mining areas and other parts of the country. In fact, there is an explicit indication that mining areas have a higher economic growth than the rest of the country. Hence, these states have higher population growth than other parts of the nation. Mining activities are most undertaken in Western Australia, Queensland, and Northern Territory. Therefore, trade is stronger in the mining states than other areas of the country; mining states account for one-third of its GDP in 2006-2007. Here, 19 % of this was contributed by the Queensland and 13% by the Western Australia. The remainder of two thirds is contributed by Victoria (24%) and the New South Wales (32%). Therefore, Australia’s economy is termed as a two speed because of the huge imbalance in the state economic performance (Pearse, 2009, pp. 200-204). Conclusion Evidently, Australian economy is facing an improved economic growth because of the mining, agricultural, manufacturing and tourism industries. However, the steady economic growth is influenced by the high rates of inflation and unemployment in the region. In addition, the country’s External stability and CAD are affected by the various factors including consumer and business confidence, foreign market conditions, exchange rates, and interest rates. What is more, Income Distribution and Resource Allocation are based on the country’s imbalance in the state economic performance demonstrated by the two speed economy. Opportunity cost also affects the country’s economy as it attempts to lower its costs. Besides, the country’s governmental and non-governmental bodies are aiming at sustaining its biodiversity through the ESD policies. References Buultjens, J. (2005). Excel HSC economics. Glebe, N.S.W: Pascal Press. Pp.60-65. Cleary, P. (2011). Too much luck: the mining boom and Australia's future. Collingwood, Vic: Black Inc. pp. 23-25. Gilding, M. (2005). The New Economic Sociology and Its Relevance to Australia Journal of Sociology, 41, 25-27. http://www.questia.com/PM.qst?a=o&d=5012047940 Goncalves, C.E.S., & Carvalho, A. (2009). Inflation Targeting Matters: Evidence from OECD Economies' Sacrifice Ratios. Journal of Money, Credit & Banking, 41, 24-28. http://www.questia.com/SM.qst?act=adv&contributors=Carlos%20Eduardo%20S.%20G oncalves&dcontributors=Carlos%20Eduardo%20S.%20Goncalves Headey, B Marks, G., & Wooden, M (2005). The Dynamics of Income Poverty in Australia Evidence from the First Three Waves of the HILDA Survey. Australian Journal of Social Issues, 40, pp. 56-62. http://www.questia.com/PM.qst?a=o&d=5014401690 Pearse, G. (2009). Quarry vision: coal, climate change and the end of the resources boom. Melbourne., Victoria, VI: Black Inc. pp. 200-205. Pigram, J. (2006). Australia's water resources: from use to management. Collingwood, Vic: CSIRO Pub. Pp.89-93. Scott, I.A. (2008). Pay for Performance Programs in Australia: a Need for Guiding Principles. Australian Health Review, 32, 34-38. http://www.questia.com/PM.qst?a=o&d=5037734351 Song, L.L., & Freebairn, J. (2005). Policies to Reduce Unemployment: Simulations with Treasury Macroeconomic Model. Economic Record, 81, 54-60. http://www.questia.com/SM.qst?act=adv&contributors=Lei%20Lei%20Song&dcontribut ors=Lei%20Lei%20Song Saunders, P. (2007). Mutual Obligation, Unemployment and Well-being Australian Journal of Labour Economics, 10, 34-40. http://www.questia.com/PM.qst?a=o&d=5044779014 Sabillon, C. (2008). On The Causes of Economic Growth: The Lessons of History. New York, NY: Algora Pub. Pp.12-15. Stapledon, N. (2009). Housing and the Global Financial Crisis: US versus Australia Economic and Labour Relations Review, 19, 45-48. http://www.questia.com/PM.qst?a=o&d=5033188291 Thomas, I. (2005). Environmental management processes and practices in Australia. Annandale, N.S.W: Federation Press. Pp.219-223. Toner, P. (2010). Innovation and Vocational Education. Economic and Labour Relations Review, Vol. 21, pp.35-37. http://www.questia.com/PM.qst?a=o&d=5046768739 Read More