Analysis of Australian Economy - Case Study Example

Running Header: Australian economy Your name: Course name: Professors’ name: Date Executive Summary The Australian economy is health as evidenced by the key parameters: Australian GDP was worth 1520.60 billion US dollars in 2012, inflation rate is about 3.6 %, and the average growth rate of the economy is 0.88% annually for the past 5 decades. Despite the slowly growing number of unemployment persons above the age of 15, the sound business environment as evidenced by the financial aggregates which shows a rising lending percentage to the private sector is bound to cut down the number of unemployed citizens. As compared to other countries, Australian economy is stable and backed by a wealth resource from its minerals and agriculture. Table of Contents Executive Summary 2 Table of Contents 3 Introduction 4 a. Real GDP Growth percentage measures and why it is an important economic indicator 4 b. Monetary policy that the Reserve Bank of Australia (RBA) is adopting 5 c. Discussion and definition of inflation, inflation rates and how it is calculated 6 d. The health of the Australian economy 8 Conclusion 10 References 11 Introduction Fundamental economic provisions elaborate the performance or health of a country’s economy. There are a number of economic parameters used to measure economic health status, the key one is the Gross Domestic Product, GDP others include rate of inflation, reserve bank monetary policies and unemployment rates and financial aggregates among others. This report focuses on Australian economy with special focus on key parameters, the GDP, inflation and unemployment rates in order to give research based view of the Australian economy. a. Real GDP Growth percentage measures and why it is an important economic indicator Real GDP Growth rate is mainly driven by four major components namely: personal consumption such as volume of retail sales, business investments such as construction, government spending and imports and exports. Notably, exports drive growth while imports have a negative impact. In essence, real GDP growth rate which is normally expressed in percentage shows a country’s economic health. The rate is positive if the economy is growing and negative when the economy is heading towards recession. Notably, real GDP takes into account the effects of inflation and other seasonal effects. In this sense, the real GDP takes into account the nominal value adjusted to consider price changes in order to give a clear picture whether the value of output has increased or prices have increased. In order to determine this, a statistical tool referred to as price deflator is used to adjust GDP from nominal to constant prices. Growth rate is normally reported quarterly but it is annualized in order for it to be compared with the previous year. Real GDP is calculated as follows; Real GDP Growth= (2009's Real GDP - 2008's Real GDP)/(2008's Real GDP) (Pearson 2009, p.23). The GDP is an imperative economic indicator because it shows economic health of a country. More so, it also gives more information about the size of the economy and its current performance. The GDP is always positive when the economy is expanding but negative when the economy is slowing down. If the GDP is growing, it means that the businesses, jobs and personal income are also growing. If the GDP is slowing down then businesses will tend to put on hold new purchases and hiring of new employees. This has a negative impact on the economy as consumers will have less money to spend on purchases and this can lead to recession. When recession occurs, the economy contracts, and the GDP is less than the previous quarter of the year before. This normally happens during the four phases of the business cycle. In the recent history, in 2008 to early 2009, the U.S. GDP growth was negative for four consecutive quarters 9Reserve Bank of Australia 2013). b. Monetary policy that the Reserve Bank of Australia (RBA) is adopting According to Reserve Bank of Australia (2013) the fundamental function of the Australian Reserve Bank monetary policy is to ensure stability of the Australian currency by controlling inflation, maintain full employment in the country and ensure economic prosperity welfare of the Australian citizens. The Australian Reserve Bank is therefore responsible for setting as well as implementing the monetary policy. The Australian Reserve Bank monetary framework policy objective is to ensure that it controls inflation. The framework has thus set a centerpiece for acceptable tolerance of inflation to be at 2-3% on average. This rate is adequately low and has minimal or negligible effect on the fundamental economical decision in the community. The Australian Reserve Bank employs the domestic operations to ensure that the cash rate is close to the target set by the board. This is achieved by managing the supply of available funds to the bank. As evident from the financial aggregate, there has been a rising lending to the private sector (Pearson 2009, p.26). This is a clear indication that inflation has been managed over the past few years and hence the reason for increased business activity in the country. The Australian Reserve Bank monetary policy favors conducting business because of its effective management of inflation to within the set margin of 2-3 %, this is evident in the 2013 inflation rate which the country recorded about 3.6 % (Reserve Bank of Australia 2013). In summary the Australian Reserve Bank monetary policy favors economic growth through its regulation policies that have seen a decline in inflation rate. c. Discussion and definition of inflation, inflation rates and how it is calculated Inflation can be defined as the sustained increase in the prices of goods and services over a period of time. It is usually measured as yearly percentage increase. In essence, as the inflation increases, the value of money tends to depreciate as it buys lesser goods than it did in the previous years. In essence, when inflation is there, the value of a dollar does not stay constant. Dollar value is normally viewed in terms of its purchasing power which translates to the actual services or goods which the dollar can buy in real life. Increasing inflation signifies a decrease in purchasing power of the money. As an example if inflation rate is at 3% annually, then basically a $2 suitcase will cost about $ 2.03 in a year’s time. There are a number of variations of inflation as identified below(Pearson 2009, p.19). Deflation- this is when the general price level is dropping, this is the reverse of inflation Hyperinflation- this is an extreme inflation or rapid inflation, this can lead to a breakdown of a nation’s monetary system. This case of hyperinflation occurred in Germany in 1923 when the prices of products increased by 2500% within a period of one month (Hossain 2009, p.23). Stagflation- this is a combination of high unemployment and economic stagnation with inflation. This occurred during the 70s when there was a combination of a bad economy and increase in OPEC oil prices (Hossain 2009, p.23). The causes of inflation are not universally agreed but there are general theories which have been accepted. The first theory is the demand-pull inflation; this is where the growth of demand is greater than the supply hence forcing prices to increase. The second accepted theory is the cost –push inflation; this occurs when companies experience cost increase, this forces them to increase prices in order to maintain their profit margins. Increased cost includes; wages, taxes and increase in cost of imports ( Hossain 2009, p.28). Inflation is normally calculated on the basis of the change of price index or consumer index. In essence, the price index measures the change in prices of goods and services as purchased by a typical consumer. Inflation rate is thus the change rate of price over time. A fundamental calculation of inflation can be done by determining the change consumer price index in a period of 1 year and converting it to percentage. As an example There are other ways of calculating inflation using price indices as identified below: Commodity price indices- this measures the price of selected commodities by weighing the key components to the perceived cost of an employee. Producer price indices- this measures the mean price changes as received by domestic producer in terms of their output. Core price indices- this is achieved by removing the most volatile elements from the price index like the CPI, this is normally achieved because of the volatile nature of some products such as food and oil (Hossain 2009, p.23). d. The health of the Australian economy As stated by Australia Unemployment Rate (2013) recent statistics shows that the unemployment rate in Australia is at 5.7% during the month of June and July. This is higher by 0.4% as compared to the same time last year. Since January of 2013, statistics indicate a rise in the unemployment rate through the months; this is a major concern because since January, the trend has continued. While there was a decrease in the number of unemployed persons by 5.700, the rate of unemployment is still a concern to the country’s economy. Notably, the employment or population ration also decreased to 61.4%. This percentage ratio shows the decline in the number of persons employed as a percentage of the population from the age of 15 years and over. More so, seasonally adjusted full-time employment dropped in the July of 2013 by 6, 700 persons. On a positive note, despite the decline in employment, an aggregate of seasonally adjusted hours worked increased by 0.5% in July of 2013 to 1,648.6 million hours. The Australian GDP was worth 1520.60 billion US dollars in 2012, the GDP value essentially represents 2.45 % of the world economy. The GDP has risen steadily over the past 5 decades and hence showing a stable and growing economy. According to Australia GDP Growth Rate (2013) the GDP growth rate of Australia as per the Australian Bureau of Statistics averages 0.88 % since 1959 to 2013, in the first quarter of 2013, the GDP expanded by 0.60% in the first quarter of 2013. As per the inflation rate, the percentage has been on the decline in 2013 as the price index of coal and gold dropped but the same was offset by the increase in iron ore and crude oil prices. In 2013 July this the price index increases by 0.6%. The commodity prices are however stable and hence decreasing the inflation, in early 2013, the inflation was less than 4 % and heading towards the target of the RBA monetary policy of achieving 2-3% inflation rate in order to maintain a stable economy. As per the financial aggregate, throughout 2012, the total credit given to the private sector by financial intermediaries increased (Reserve Bank of Australia 2013). This primarily indicates a healthy status of the business sector in the country as indicated by the GDP. However, there is a notable variation in terms of personal loans which rises and falls in every month (Reserve Bank of Australia 2012). The key indicator of financial stability is the increasing loans to the private sector. This shows that the sound business environment with investment opportunities available. As noted from the figures presented, the health status of Australian economy is positive. In fact, the GDP of Australia is about 2.45% of the world economy. This makes the nation one of the major global economies, Australia’s economy is mainly the service sector yet the country is rich in terms of its mineral resources and agriculture. In essence, Australia has a comparative advantage in its exports because of its natural resources. The inflation is also relatively small coupled with a high GDP Purchasing Power Parity (PPP) of $970.764 billion which is 18 in the world. With the private sector performing well as evidenced by the increasing loaning facilities in the financial aggregate, the Australian economy is stable and growing (Australia GDP 2012). Conclusion As noted, the Australian economy is healthy, key economic indicators show that the economy is growing constantly at a rate of 0.88% while the GDP was worth 1520.60 billion US dollars in 2012 and inflation rate is about 3.6 % in 2013. However, there was an increase in the percentage of unemployed people by 5.7% in July 2013; this is a negative indicator despite the overall increase in the country’s working population. Notably, with the sound economy, the private sector is investing as evidenced by the increasing monthly lends throughout 2012 and 2013. This is a major positive economical indicator as the percentage of employment is expected to reduce once the returns on investments are witnessed. References Australia GDP Growth Rate 2013, Trading economics, accessed from http://www.tradingeconomics.com/australia/gdp-growth Australia GDP 2012, Trading Economics, accessed from http://www.tradingeconomics.com/australia/gdp Australia Unemployment Rate 2013, Trading Economics, accessed from http://www.tradingeconomics.com/australia/unemployment-rate Hossain, AA 2009, Central Banking and Monetary Policy in the Asia-Pacific, Edward Elgar Publishing, Sydney. Pp.20-32. Pearson, G 2009, Financial Services Law and Compliance in Australia, Cambridge University Press, Melbourne. Pp. 19-31. Reserve Bank of Australia 2012, Financial aggregates, accessed from http://www.rba.gov.au/statistics/frequency/fin-agg/2012/fin-agg-0112.html Reserve Bank of Australia 2013, Measures of Consumer Price Inflation, accessed from http://www.rba.gov.au/inflation/measures-cpi.html Reserve Bank of Australia 2013, About Monetary Policy, accessed from http://www.rba.gov.au/monetary-policy/about.html Reserve Bank of Australia 2013, Index of Commodity Prices, accessed from http://www.rba.gov.au/statistics/frequency/commodity-prices/2013/icp-0713.html Read More