Australian Macroeconomic Policy - Inflation, Unemployment, and Growth - Statistics Project Example

Introduction Australia's economy ranks among the largest among the world's capitalist economies. In the year 2011, Australia's wealth was estimated at 6.4 trillion dollars. The outcome of the Australian economic policy has been credited with ensuring that the economy has been resilient. Australian financial system has been stable and proper regulations have ensured that banks have gone through the global financial crisis unscathed (McDonald & Morling, S 2011, p.44). This essay focuses on the Australian economy and specifically the experience of the economy over the last 15 years. The essay also discusses the concept of instruments and targets in macroeconomic policy and how the concept can be applied in the current policy framework in Australia. The essay shall also seek to demonstrate how an economic theory learnt can be used to explain Australia's current macroeconomic policy. The topic is important as it makes it possible to understand how the world economy operates in general and the Australian economy in particular. Discussion Australia's economy has avoided recession for more than two decades. However, despite the very good statics for the last two decades, there are many challenges that policy makers face (Mankiw 2006, pp. 20-49). This state of affairs has resulted from existence of conflicting signals. In the month of June, the Reserve Bank of Australia (RBA) made a decision which saw the benchmark interest rate reducing by 0.25%. The reason advanced for this was that there was need to afford more support to the domestic activity. The day following the decision by the RBA, the quarter economic growth report for the month of March show a growth rate of 1.3 % which translated to 4.3% for the year. This figure proved to be higher than the markets and even the RBA were expecting. Despite the good growth figures, how individual Australians view them determines their attitudes. The GDP figures have tended to appear lower but the perceptions of the Australian determine how the country views the economy. States which have large employment in financial services have been more pessimistic about the state of the country's economy. This has led to industries such as accounting, legal, banking and management industries. There are other states such as the Northern Territory, Western Australia and Queensland which are posting good results due the large number of mining as well as projects related to infrastructure. The Northern Territory for example posted a growth of 7.3% while the Western Australia posted a growth of 7.8%. This contrast with New South Wales contraction of the economy by 0.3%. The differences are also evident when it comes to investments in business. New South Wales experienced a fall of 7.1% in business investment while Western Australia posted a growth of 23% (Parkinson 2011, p.71). The figures mean that policymakers have a difficult time since what they need to do is to strike a balance between state interests which are quite divergent. With regard to monetary policy, the Reserve Bank of Australia has had to balance the interest of states that have no minerals whose interests are lower rates which would ensure that the growth is stimulated (Kriesler 1999, p.84). There are risks that bringing the interests far down would see the mining states experiencing too much growth and this could lead to inflation. With regard to the fiscal policy, the Australian government has to grapple with a myriad of challenges resulting from the mining boom. The exemplary performance for the mining sector has been a boon to miners, shareholders as well as companies which offer services to the mining industry (Mankiw 2006, pp. 20-49). The resulting strengthening of the Australian dollar has had some negative impacts. For example is has hit tourism hard since tour operators have had to deal with the rising cost of labour. The government sought to introduce a mining tax. The mining tax was initially calculated to tax revenue raised was high so that wealth would be redistributed. The other aim of the mining tax was to reduce the effect of the mining boom to those areas that do not have mineral and this was meant to discourage companies from overinvesting in mining (Young 1928, p.529). The intention was that only 'excess' profits would be taxed and thus the mining industry would maintain profitability but not too much so as to disadvantage those states that do not produce minerals. The intentions of the taxation regime were not achieved since intense lobbying meant that the tax regime that resulted was very dilute. The following graphs show some of the major macroeconomic aggregates for Australia. Sources: Gordon, C & Valentine, T 2009, Economics in Focus: The Global Financial Crisis, Pearson Education, NSW. Instruments and Targets in Macroeconomic Policy and their Application in Australia Macroeconomic policy instruments are the macroeconomic quantities which the policy maker in an economy can control directly (Otto 2007, pp. 216-224). These instruments can be divided into fiscal policy and monetary policy instruments. The executive and the legislature are in charge of the fiscal policy (Gordon 2009, pp. 98-150). The management of fiscal policy is done through the budget of a nation. The Reserve Bank of Australia takes charge of monetary policy. Through the macroeconomic instruments, the policy makers tend to set certain goals or aims which can be described as target. A budget of a country in essence sets for example the amount of money that the government projects to raise as well as how that amount shall be spent. Monetary policy would involve the Reserve Bank setting benchmarks as to how much money shall be in supply as well as setting interest rates with the aim being to promote growth of the economy as well as stability (Young 1928 pp. 122-128). Monetary policy does affect the performance of a country’s economy. Monetary policy, being concerned with the use of money supply, use of interest and exchange rate can be used to influence how economic activities in a given country are expected to perform (Coysh & Treyvaud 1968, pp.200-216). Monetary policy has several aspects. Inflation target is one such aspect. Many countries use this to ensure that rates of inflation are kept to the minimum. Up to 2007, inflation targeting was regarded as a way that was effective in control of inflation. Many economists have advanced the argument that inflation targets should not just be based on Consumer Price Index (CPI) but include other variables which would include prices of assets. Doing this would act as a deterrent to asset price bubbles occurring. Changes in interest rates are another aspect of monetary policy (Wicksell 1934, pp. 12-37). The changes in interest rates are calculated to achieve the inflation target. Where there are predictions that the rate of inflation would arise the target the Reserve Bank of Australia would increase the base rate (Gordon 2009, pp. 98-150). The third aspect to monetary policy is quantitative easing. This relates to the Reserve Bank buying corporate and government bonds from commercial banks as well as other financial institutions. The effect is that such institutions increase their deposits and they get more ability to lend either to business customers or even private customers. Where banks are risk averse this would not work very well. When the amount of money in circulation increases the exchange rate depreciates. Fiscal Policy Fiscal policy refers to measures such as taxation and expenditure used by a government so as to determine a country's economic activity (Swan 1956, pp. 14-39). There are key features of fiscal policy and these include automatic stabilizers and discretionary fiscal policy. Automatic stabilizers relate to government revenue and expenditure from certain taxes changing relative to the state of the economy and the Gross Domestic Product (GDP). Discretionary fiscal policy refers to changes in public and taxes which are made deliberately (Kriesler 1999, pp. 120-128). After the global economic crisis, many countries have introduced fiscal stimulus meant to prevent countries from getting into recession. The government of Australia can make use of the instruments and targets to stabilize the economy. Australia prides as ranking among the countries where regulation of the economy is efficient as well as being transparent. With regard to fiscal policy, this has been stable to a large extent. The country has set the high rate for income tax at 45% while there is a flat corporate tax rate which is at 30 percent. Introduction of a carbon tax led to prices escalation. The government of Australia has managed to minimize public debt though it has risen to about 24% of the GDP. Macroeconomic Theory Macroeconomic theories are scientific theories aimed at explaining the phenomena that relate to the macro economy. The phenomena investigated are inflation, unemployment, and the level of aggregate production (Torrens 1820, pp. 34-59). Macroeconomic theories help with provision of policy recommendations that are meant to ensure that the economy of a country improves and that macroeconomic problems are corrected. The Theory that helps explain the current macroeconomic policy in Australia is IS-LM (Income Spending-Liquidity Preference Money Supply) model. This is a macroeconomic tool that is used to demonstrate how, in the goods and services and also the money market there is a relationship between the real output and the interest rates (Gordon & Valentine 2009, pp. 165-188). This model emerged in an economic conference which took place in Oxford in 1936. Various economics presented their papers which described mathematical models which would summarize John Maynard Keynes' theory known as General Theory of Employment, Interest, and Money. John R. Hick came up with the IS/LM model (Hicks 1980-1981, pp. 139–155). Hicks did concede that his model did miss some important points seen in the Keynesian theory which he criticized as being of little use outside the classroom (Hicks 1980-1981, pp. 139–155). A shift in one of either the LM or IS curves results in change of expectations and thus shifts the other curve. Many macroeconomists think that IS/LM model as a good starting point to understand how the real world operates. There have been criticism about the theory being imperfect but there is a wide acceptance of the model for its role in understanding of macroeconomic theory (Mankiw 2006 p. 19). This model is shown as a graph which has two lines which intersect in the first quadrant. The national income is represented by the horizontal axis and it has the label Y. The vertical axis on the other hand is used to indicate the real interest rate, i. The model is non-dynamic and therefore the relationship between the real interest rate and the nominal interest rate is fixed. Money demand is a variable which depends on nominal interest rate and consequently, this can be expressed to depend on the real interest rate. Short run equilibrium is represented by the point where the schedules intersect but this is only in real and monetary sectors. The equilibrium so created comes up with combination of rate of interest and real GDP. The current economic policy in Australia does follow the IS/LM model. The fiscal policy in Australia is based on a framework that is medium term and this is designed there is a balance in the budget during the budget cycle. Having a medium term framework is meant to ensure that the balance sheet of the government is good. The 'over the cycle' emphasis in formulating the fiscal strategy makes it possible to use fiscal policy as a tool to manage demand (Parkinson 2011, pp. 53-99). The government of Australia has sought to maintain a balance between supporting growth of the economy, maintaining a fiscal position which is strong, investing in the future as well as jobs. The government therefore endeavours to ensure that the decisions on fiscal policy result in the economy growing while maintaining the unemployment levels to very low levels. The strength of the dollar and commodity prices which have been falling has had a great impact on the profits realized in the corporate sector (McDonald & Morling 2011, pp.200-250). The government fiscal strategy is geared towards the evolving fiscal and economic circumstances. The Australian government has sought to be restrained on its spending which is meant to ensure that the economic growth is not negatively affected. The monetary policy in Australia is aimed at ensuring that inflation is held at an average of 2 to 3 percent over the budget cycle. This is meant to manage demand and ensure that the economy is growing as would be expected where there is low inflation. Monetary policy is geared towards ensuring that demand grows in relation to its potential while there should be an exchange rate which should be able to guard against global shocks on the economy (McDonald & Morling 2011, pp.200-250). Conclusion Australia's economy ranks among the largest in the world. Australia's economy has experienced growth for the past two decades while other economies were going into recession. There have been mixed reactions as to whether the Australian economy can maintain the positive results into the future. The economic policy makers have had a difficult time dealing with the economy. Through the use of fiscal and monetary policies, the Australian government can influence the direction that the economy takes. The measures that the government has put in place can best be explained by IS-LM model whereby the goods and services in addition to the money market affect the interest rates as well as real output of a country. References Coysh, LJ, & Treyvaud, ER 1968, Impacts in and on the Australian economy, Melbourne: Patoline Pub. Co. Gordon, C & Valentine, T 2009, Economics in Focus: The Global Financial Crisis, Pearson Education, NSW. Gordon, R J 2009, Macroeconomics (Eleventh ed.), Boston: Pearson Addison Wesley. Hicks, J 1980–1981, "IS-LM: An Explanation", Journal of Post Keynesian Economics, vol. 3, pp 139-155 Hicks, JR1937, "Mr. Keynes and the Classics – A Suggested Interpretation", ''Econometrica'', Vol.5, pp 147–159". Kriesler, P 1999, The Australian Economy 3 Economics drives today's news - read this book to understand how, Sydney, Allen & Unwin. Mankiw, NG 2006, "The Macroeconomist as Scientist and Engineer". p. 19. McDonald, T & Morling, S 2011, The Australian economy and the global downturn, Part 1: Reasons for resilience, Economic Roundup Issue 2, September 2011. Meredith, D, & Dyster, B 1999, Australia in the global economy: continuity and change. Cambridge: Cambridge Univ. Press. Nieuwenhuysen, JP, Lloyd, P, & Mead, M 2001, Reshaping Australia's economy: growth with equity and sustainability, Cambridge, Cambridge University Press. 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. Parkinson, M 2011, Sustainable Wellbeing — An Economic Future for Australia, The Shann Memorial Lecture, August 2011. Swan, TW 1956, 'Economic Growth and Capital Accumulation', Economic Record, 32, pp. 334-61. Torrens, R 1820, An Essay on the Influence of the External Corn Trade upon the Production and Distribution of National Wealth, 2nd edn, London: Hatchard. Wicksell, K 1934, Lectures on Political Economy (first Swedish edn 1901), London: Routledge. Young, AA 1928, 'Increasing Returns and Economic Progress', Economic Journal, 38, pp. 527-42. Read More