Macroeconomic Policy in Australia - Case Study Example

Running Header: Macro-economic Policy in Australia Student’s Name: Instructor’s Name: Course Code & Name: Date of Submission: Macro-economic Policy in Australia Introduction It has been evident in the last about ten years that the macro-economic policy that has been embraced in Australia has had focus on brining regulation to the growing inflation that has affected the Country for a while. This is because of the held belief by the economy stakeholders who associate macroeconomic growth of Australia with the country’s growth and development. After the global recession the policy makers in Australia have associated macroeconomic policy with efforts to control a recurrence of the recession in the economy. This paper will make efforts with regard to contrasting the two policies that have been applied. It would additionally explain the targets, policy objectives, and instruments have differed. The Australian economy has been affected by a number of policy reforms that have characterized the 1990’s productivity surge. For a decade the economies productivity surge has also been significantly affected by the strong international standards that have been established over time. The Australian economy recorded labor productivity growth that was in excess of that which was set by the OECD. It is said that the country recorded the highest productivity accelerations among the member countries of the OECD (Parham 1999, pp. 31). Australia has been one of the countries that has performed well with a faster average income growth. This was evidenced in both (labor) productivity and labor utilization. This was caused by Australian population that worked for more people working more hours thus more productivity (Parham 1999, pp. 23). II. The experience of the Australian economy over the last 10-15 years. The Australian economy has faced a number of challenges with regard to the challenges it has faced to stimulate economic growth and development (Parham 1999, pp. 33). The last 10 years have been characterized by a strong productivity performance. However there have been major challenges that the policy makers have faced to date that and a number of challenges that they have faced in 2011. The challenges include the following. (I)Measurement error In the last ten years economic policy makers have indicated that there have been challenges with regard to the measurement errors that have been made with regard to detecting the productivity surge that has been witnessed in the economy. The policy makers in Australia have taken the initiatives to measure the productivity estimates and this has been accompanied by some degree of measurement errors. It is said that the measurement errors are responsible with regard to their false contribution to productivity acceleration. The policy makers in Australia consider the measurement errors to affect most of the service industries. This usually has led to underestimates in productivity growth and outputs in the last ten years. This has been regardless of the rapid growth that has been witnessed in the service industries in this period. In essence, the challenge of errors in measurement in services reduces the signs of acceleration in productivity and thus economic planning with regard to the future projection of the economy becomes a problem (Banks 2001, pp.32). (II)Property & business services Macroeconomic policy makers have also been faced with the challenge of a number of laws that influences management of the economy. This includes the Bureaus exclusion of the Property and Business services (PBS). This exclusion rule has been the source of upward bias with regard to the detection of productivity acceleration which in turn affects projections of the incomes that the economy would raise. Quiggin (2001) has advanced that most of the output that makes up the PBS is made up of the inputs that goes into the market sector. He also suggests that any error in measurement of PBS output leads to an error in measurement of the value added to the market sector. Report from the OECD has shown strong indications that that there have been productivity gains in the business service sector of the Australian economy. In addition, the last ten years have been characterized the Australian economy as a high user of the IICTs in the economy’s bid to reap economies of scale. Increased use of ICTs in the economy has played a big role in facilitating growth in production from the economy through the innovations and reorganizations that have been effected in the economy (Edwards 1999, pp. 38). (IV)Education and skills One of the challenges that macroeconomic policy makers have faced in Australia is the issue of education and skills among the Australian workforce. As much as an increased skill in the workforce has been realized, there have been challenges with regard to elimination of the unskilled workforce in the economy (Edwards 1999, p. 43). It has been acknowledged that increased skills in the economy’s workforce have played a great role towards the productivity growth that has been witnessed particularly in the service industry in the last ten years. It has been noted that the retention rates of students who enroll for secondary school studies to have increased. This has been accompanies by increased participation of students at tertiary level. The women in Australia in the tertiary institutions have also actively been involved in business initiatives which have accounted to the increase in productivity. The challenge that has faced the policy makers is with regard to the relevance of the curriculum with regards to the upcoming needs that the economy faces particularly as evidenced in this year, 2011. Policy makers have also acknowledged that if the trend of skills transfer to the students at secondary and tertiary level increased in the next ten years, then from the skilled workers their output per hour worked also increases (Edwards 1999, pp. 37). (V)General Policy reforms in Australia There have also been challenges in a number of policy reforms that came in to the Australian economy as a result of the policy maker’s efforts to avoid occurrence of recession in the country. A number of reform have also been effected to deal with the challenge of competition that came in as a result of competition that crept into the economy after the Country established a free market with strong economies such as the United States. Economic reforms have helped to raise the performance of the Australian economy with regard to its productivity levels; however this has come with some challenges that are likely to affect the economy in the year 2011. The economy in 2011 is posed by a few challenges that have to be addressed by Australia’s economy policy makers so as to keep the upward trend of growth in the economy’s productivity (Bresnahan, Brynjolfson, & Hitt 2002, pp. 44). The challenges include the following. •sharper competition: The opening up of the Australian market has been accompanied with various challenges that need to be addressed. The increased competition from foreign investors has been caused by the reduced barriers with regard to foreign and trade investments. This has also been coupled by the increased incentives that have been given to businesses which seek new markets within the country. This has been challenging this year because it has made the economy to be volatile to crude business practices which may go unnoticed for quite a while. The challenge with regard to the percentage of workers who would work in the foreign owned companies has remained to be a question for the economy planners. Deregulation and pro-competition regulation of business operations have additionally come with their related challenges (Edwards 1999, pp. 45). •greater openness to trade, investment and technology: This has been a boost to the economy with regard to its resultant effect of increasing specialization among the business operators. Specialization comes with costs and expertise which often are not available within the borders of Australia. This has caused challenges with regard to solving the problem of unemployment in the country. Openness to investment and technology has also put economy policy makers to question its effectiveness with regard to the increased technology needed in industries which requires expertise that is not locally available (Edwards 1999, pp. 47). •The challenge of management of service industries. There has been a high influx of service industries in Australia in 2011, and the policy makers are questioning the ability of the stakeholders to regulate these industries. Regulation with regard to embracing a quota system on the number of employees from Australia that the foreign companies should employ has also been an issue of debate among the policy makers with the respective authorities (Banks 2001, pp. 43). III. The Concept of instruments & Targets in Macro-economic Policy The concept of 'instruments and targets in macroeconomic policy include the tools that the policy makers of a given economy use to regulate the running of the economy. This particularly affects the control of the supply and demand of money that is found in a given economy. These instruments and targets are often used by the respective central banks of the various countries, the Government through borrowing and its expenditure, and the commercial banks through the amount of money that they release to the economy through their lending services. The economy is run through investments which flow from the cash that is pumped into the investment ventures, the production costs, and the resultant revenues that are raised from consumption of the given product or service by the members of the economy. There are various instruments and targets that are used in macroeconomic policy and decision making; however the two broad instruments are the fiscal policy and the monetary policy. The fiscal policies are linked to taxes that are subjected to consumers in the economy, as well as the expenditure that the Government spends on its projects. This money flows into the economy. The monetary policy relates to regulation of the supply and demand of money in the country. This is to avoid the cases of inflation or deflation in the country (Bresnahan, Brynjolfson, & Hitt 2002, pp. 44). This concept may be applied to the current policy framework in Australia. This can be done through the policy makers of Australia sketching out relevant policies that will promise the economy security against increased inflation that has been evidenced in the country (Aizcorbe 2002, pp. 37). The policy makers particularly the Central bank and other commercial banks should embrace monetary policies such as increasing lending rates to control excess money to be in the Australian market as a measure to control inflation. The Government of Australia should also check its tax mechanism so as it is balanced with regard to controlling overtaxing products which may affect foreign investments from investors (Edwards 1999, p. 47). IV. Economic Theory Keynesian theory This is a theory was known advanced by Keynes who came up with the theory to explain what determines investment, production, saving and consumption. Investment, consumption, production, and saving are major elements in any given economy that directs how an economy fairs on. In this theory, Keynes comes out to explain that the aggregate demand, as well as aggregate supply determines the employment level and output of that economy. Keynes advanced this theory after outlining a number of failures that he attributed to the economy. Keynes strongly opposes the main concept in classical theory that the level of output is a key determinant to the level of employment in a given economy (Parham 1999, pp.33). Keynes sought to develop a theory that would explain determinants of saving, consumption, investment and production. In that theory, the interaction of aggregate demand and aggregate supply determines the level of output and employment in the economy. Keynes theory supports the two main costs of labor and money to be responsible to the shift of demand and supply. Demand and supply can be adjusted through monetary policy that affects the flow of money. The proponents of the theory further argue that if there the supply of labor is high than the demand forces, then wages becomes low. Consequently, if the saving levels of consumers is high and the level of consumption is high, then the interest level would fall the level of savings is cut (Banks 2001, pp. 54). In macroeconomic policy, the Keynes theory has been applicable in many areas with regard to defining the relationships that exist between consumption, production, savings and investment. It is important for economy policy makers to consider the stability of their economies through controlling these areas of the economy. When the government of Australia for instance increases incentives for saving through measures such as sale of treasurer bonds, which attract high returns then interests rates will rise. The government should also regulate the demand and supply of its money and foreign reserves so as to stabilize the economy by avoiding both extremes of inflation and deflation (Parham 1999, pp.43). Conclusion All in all, policy reforms that have occurred in Australia are said to be the major drivers and enablers in the economy. They are the ones that have opened up the economy to trade, and investment. They have promoted technological advances, and allowed flexibility in the Australian market that has worked for the good of the consumers, producers and the economy’s policy markers. The last 10 years has been characterized by economic growth with regard to its productivity, which is attributed to the new technological advancements, opening up of markets, and the play of the instruments of macroeconomic policy. References Aizcorbe, A. 2002, ‘Why are Semiconductor Prices Falling so Fast? Industry Estimates and implications for Productivity Measurement’, Federal Reserve Board (mimeo). Banks, G. 2001, ‘Get it Right on Productivity Growth’, Australian Financial Review, 6 March, p. 51. Bresnahan, T., Brynjolfson, E. and Hitt, L. 2002, ‘Information Technology, Workplace Organization and the Demand for Skilled Labour: Firm-level Evidence’, Quarterly Journal of Economics, February, pp. 339-376. Edwards, J. 1999, A New Australian Economy, HSBC Economics & Investment Strategy, HSBC Markets Ltd, Sydney. Parham, D. 1999, The New Economy? A New Look at Australia’s Productivity Performance, Productivity Commission Staff Research Paper, AusInfo, Canberra. Read More