Economics for Decision Making in Australia - Case Study Example

Economics for Decision Making Name: Tutor: Course: Date: Abstract Macroeconomic policies in Australia have typically been effective in influencing the short-term demand in the economy. The macroeconomic policy includes two major policy settings namely the fiscal and monetary policies. During the past few years, the fiscal and monetary policies have played an important role in controlling the economic conditions aimed at inducing economic growth in Australia. Therefore, using the fiscal policy the Australian government aims to improve its national savings, control the public debt and maintain stability by providing the opportunities for economic growth. In addition, the Reserve Bank of Australia (RBA) uses the monetary policy to influence the availability and cost of money or credit in the economy. Introduction Australia is one of the largest economies in the world, which has had strong economic prospects for a significant number of years in the past. This has largely been enabled by the appropriate macroeconomic policies in Australia. However, the euro zone crisis and the economic recession, witnessed in the recent past, have had negative implications on the economic condition of the country. Australia in the recent past few years, has transformed to a country that substantially relies on market mechanisms rather than significant interventions, ownership and control economic activities by the government as witnessed in the past. The two macroeconomic policies used in Australia include the budgetary/ fiscal and monetary policies. These policies are used to manage the level of activity in the economy. Using the fiscal policies the government attempts to regulate and control the economy with the aim of reducing unemployment rate, influencing interest rates to control the economy, controlling inflation and stabilizing business cycles. Therefore, through fiscal policies governments can manage the level and consumption of government revenues. Using fiscal policies, the government can also put in place methods to be used to finance budget deficit and also how to use budget surplus (Ball & Seidman, 2011). In addition to the fiscal policy, the monetary policy by the Reserve Bank of Australia also forms an important component of the macroeconomic policy setting in Australia. The Reserve Bank of Australia (RBA) uses the monetary policy to influence the availability and cost of money or credit in the economy. Typically, the aim of using monetary policy is to attain internal balance. This is achieved by influencing interest rates using operations in the domestic markets such as government bonds’ sales and purchases and regulating money supply to correct a shortage or surplus of funds in the short term money market. Therefore, to ease the monetary policy in Australia, the RBA would buy bonds to create and increase liquidity within the economy. Subsequently, this would decrease interest rates and increase investment and consumer spending, which eventually lowers the unemployment rate. On the other hand, increased inflationary pressure would necessitate the tightening of the monetary policy. In this case the RBA would be induced to sell bonds, soak up funds, which would eventually push up the interest rates. Consequently, the consumer spending decreases. Therefore, during the course of the business cycle, the Reserve Bank of Australia will ease or tighten the monetary policy to control and prevent the inflation from spilling over the targeted 2-3% average range. However, in some instances, the RBA may influence the exchange rate to maintain stability in the economy without necessarily altering the monetary policy. It achieves this by sterilized intervention through buying or selling of bonds equivalent to the amount of Australian dollars that have been bought or sold. This would maintain a relatively constant amount of money in circulation, which would not necessitate a change in the monetary policy. Economic Analysis Typically, Australia has been one of the countries with high immigration rate as people from all over the world venture into the country in search of better business opportunities and education. It is one of the largest capitalist economies in the world and is dominated by its service sector, which accounts for approximately 68% of its GDP. However, the economic growth in Australia is largely dependent on the mining sector, which contributes approximately 18% of the GDP and the agricultural sector. Most of the products in these two sectors are exported to mainly the East Asia Market. In April, 2012, the International Monetary Fund (IMF) predicted that Australia would be the best performing major advanced economy over the next two-year period 2013 and 2014. As a result of tightened macroeconomic policy setting, the Australian dollar has appreciated over the last few years with subsequent increasing economic growth rate from 2010. This is quite a positive trend since the Australian economy is still on a slow economic growth after its economic recession in 2009. In the recent past, there has been a strong debate on the current macroeconomic policy in Australia. This has largely been due to increasing level of government debt triggered by increased spending by the federal government. Therefore, policy makers would still have to embark on formulation and implementation of policies which would increase revenue and cut down on the government expenditures. Nevertheless, as a result of the slow economic growth and low inflation rate in the Australia since 2010, the money and capital market in Australia is stabilizing and performing quite well, with projection of better performance in this year. This subsequently encourages investors to invest in the stocks and the financial securities listed in the stock market. Currently, the interest rate in the Australia is bench marked at 2.5% by the Reserve Bank of Australia (RBA). According to the World Bank, in 2013 the Gross Domestic Product (GDP) of Australia was estimated to be U.S$1.5 trillion. This implies an estimated GDP growth rate of 2.5% in 2013. However, in the financial year 2012, the World Bank statistics indicate that Australia’s real GDP growth increased to 3.4% from 2.4% registered in 2011. In the financial year of 2010, the Australia’s economic situation fairly stabilized. This led to the increase in its Gross Domestic product (GDP) and recovery from a GDP growth rate of 1.6% and the downward trend witnessed in the year 2009 to a real GDP growth of 2.1% in 2010. This indicates that from the year 2010, there has been an increasing positive trend in the GDP growth rate in Australia from 1.6% GDP growth rate in 2009 to 3.4% in 2012 as estimated by the World Bank. The GDP growth rate (% annual) in Australia for the respective years is as indicated in Figure 1 below; Figure 1 Data Source: The World Bank As stated there has been generally low inflation rate in Australia recently. Figure 2, illustrated below shows the inflation rates for the respective years. Figure 2 Data Source: The World Bank According to the World Bank statistics, in 2008, the annual inflation rate was 4.4% but decreased to 1.8% in 2009. However, in 2010 and 2011, the inflation rate increased to 2.8% and 3.4% respectively, but decreased to 1.8% in the year 2012. Furthermore, based on the statistics from the Australian Bureau of Statistics, the rate of unemployment in Australia has in the past three years been on a steady decrease. However, with the slow economic growth, the Australian government has been engaged in policy making and implementation measures aimed at cutting down on its revenue spending. However, the deficit in the government financial budget has been a major problem and challenge for the economic growth in Australia. The estimated annual budget deficit for the year 2012-2013 was established to be a high of 12.3 billion U.S. dollars. This has subsequently led to increased borrowing costs by the Australian government (Ball & Seidman, 2011). Figure 3 below shows the average annual unemployment rates in Australia from the year 2002 to 2012. Figure 1 Data Source: Australia Bureau of Statistics As illustrated in figure 3, the unemployment rate in the U.S. has been on a steady decline from the year 2010 through to the year 2012. This reduced unemployment rate has largely been as a result of the slow economic growth. The current favourable macroeconomic conditions in Australia have significantly been contributed by high terms of trade. Australia has over the recent past years shifted its major trade from Europe and North America to East Asia markets. A larger proportion of the natural resources such as coal, iron ore and wool are exported to the Japan and East Asia markets. Figure 4 illustrates the trend of trade in Australia from 2002 to 2012. Figure 4 Data Source: The World Bank Conclusion and recommendations The current macroeconomic policy setting in Australia has largely contributed to the strong economic growth in country relative to other advanced economies. However, the policy makers should continually monitor the economic conditions and adjust the macroeconomic policy accordingly in order to maintain favourable economic conditions in the country. Therefore, during periods of economic recessions, the government could lower the interest rates. This would encourage investment and consumer spending. In addition, the lowered interest rates would also reduce borrowing cost. Subsequently, the increased investment and consumer spending would lead to improved economic growth. Consequently, the unemployment rate will decrease. However, the inflation will tend to increase due to increased consumer spending. In addition, the federal government should reduce spending and lower the tax rates on the taxable income of individuals. This would mean that the consumers would have more money to invest or spend. Subsequently, the increased investment and consumer spending would lead to improved economic growth. The annual budget deficit will also be reduced as a result of decreased government spending. This fiscal policy would also tend to increase the rate on inflation because of increased aggregate demand. However, the unemployment rate will subsequently tend to decrease. Reference List Ball, MK & Seidman, D. (2011). Supply and demand, The Rosen Publishing Group. Australian Bureau of Statistics, 2014, Annual unemployment rate [Data file]. Retrieved from http://www.abs.gov.au/AUSSTATS/ The World Bank, 2014, GDP growth rates, Inflation rates and Trade in Australia, Retrieved from; http://data.worldbank.org/ Read More