Impact of Globalisation on Australia

This report discusses the impact of globalisation on the Australian economy, including economic objectives, fiscal policy, microeconomic reform, balance of payments, exchange rate, and more.

Affect of globalisation on
Australia

Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY..................................................................................................................................1
Economic objectives, Fiscal Policy.............................................................................................1
Microeconomic Reform...............................................................................................................2
Cost/Benefit Analysis..................................................................................................................2
Balance of payments, Current A/c, Financial & Capital A/c......................................................3
Exchange rate...............................................................................................................................4
CONCLUSION................................................................................................................................4
REFERENCES................................................................................................................................5

INTRODUCTION
Globalisation is a procedure in which individuals and organisations of a domestic country
interacts and integrates with individuals and organisations of foreign countries for the objective
of trade and investments (Baker, Merkert and Kamruzzaman, 2015). The economic issue which
is discussed in this report is the affect of globalisation on Australia. The concept of globalisation
has various benefits to an economy but it also has various drawbacks which have turned into an
issue for the economy of Australia. According to the data procured from Australian Institute of
International Affairs, globalisation acts as an issue to the Australian economy as it has resulted in
financial reforms (Australian Institute of International Affairs. 2020).
In this report, economic objectives along with fiscal policies of Australia is discussed along
with microeconomic reforms. Furthermore, a cost benefit analysis has been conducted with
evaluation of balance of payments and capital accounts. Lastly, this report will analyse exchange
rate and impact of globalisation on Australian dollar.
MAIN BODY
Economic objectives, Fiscal Policy
Economic objectives of a country are the targets that a nation wants to achieve with respect
to its economy (Daley and Wood, 2015). Reserve Bank of Australia has set the target of
achieving price stability in the country and controlling the inflation rate within an acceptable
range of 2%-3%. Inflation refers to an increase in prices. The government of Australia seeks to
achieve an objective of full employment to increase the rate of economic growth in the country.
Full employment doesn’t mean zero unemployment but unemployment somewhere between a
rate of 5%-6% or maybe even lower than that. The government has an aim of achieving
‘sustainable economic growth’ which is defined as the fastest growth rate of GDP that
compliments the other economic objectives of the country. Current objective is to have a growth
in GDP by almost 4% every year.
Every year, Australian economy exhibits transactions with people from all over the world
in huge amounts as an impact of globalisation. These transactions are either recorder on the
credit side (exports) of the Balance of Payments account or on the debit side (imports). A higher
current account deficit implies more imports over the exports which also plays an important role
in determining the currency exchange rates in the international market. Rise of the Australian
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dollar makes export less attractive in the international market and imports seem more attractive
which increases the current account deficit. Australian government has adopted various policies
to achieve its objective of external financial stability which has impacted the export and import
of goods. Over the past few years, CAD of Australia has trended upwards has been quite large in
size. In the early decade of 21st century, CAD expressed as a percentage of GDP has reached an
average of over 5% which is much higher than the government target of 2%-3%. Government
has adopted increased taxation policy on imports of luxury goods to balance the debit and credit
side of balance of payments account as their fiscal policy (Fiscal Policy of Australia, 2020). It is
providing subsidiaries and tax relaxations to firms engaged in manufacturing of products that are
being exported. Higher exports in comparison of imports leads to a smaller current account
deficit which increases the aggregate demand in the country helping the government to achieve
its objective of sustainable economic growth. The average economic growth was 3.6% between
the period of 1996-97 to 2005-06 which just fell short of the government’s target of 4%.
However, with the stimulation of aggregate demand, inflation also shows an upward trend.
Encouraging the export has also helped in creating more employment opportunities. The
unemployment rate in 1992-93 was 11% which dropped by almost 60% to a rate of 4.4% in
2007.
Microeconomic Reform
Australian government establishes a modern export documents system in which they are
replacing paper documents with online system. This reform has the purpose to make this system
more effective and efficient.
By this process, whole procedure of documentation will be quick and this will positively
impact economy (Microeconomic Reform in Australia, 2020). According to the Australian
government, this reform will positively impact the economic growth of the country as it will
result in evidence of every transaction by which reliability and viability will enhance.
Cost/Benefit Analysis
Cost benefit analysis is the procedure of decision making in which various alternatives are
analysed by evaluating their strengths and weaknesses (Gregory and Smith, 2016). In this
procedure benefits of all the options are examined and then compared with their cost association
which will be spend selecting a course of action. This procedure helps in analysing which
alternative provide high benefit after subtracting its cost and then that option is selected.
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The fiscal policy which is adopted by Australia states that increased taxation rate will be
applied on the import of luxury products. This policy is appropriate as the costs incurred in
implementing this policy is low but the benefit gained by this policy is high. By selecting this
alternative as a fiscal policy, Australian government overpasses the opportunity cost of high
imports and exports. Also by adopted this policy, Australia will gain benefit of lower imports
which will result in effective balance of payments.
Balance of payments, Current A/c, Financial & Capital A/c
The concept of balance of payments (BOP) is the statement which records summary of all
the transactions which a domestic country’s companies, individuals and government bodies
conduct with rest of the world. These transactions include imports and exports (Kirchner, 2013).
Typically, there are three components of BOP which are current account, capital account and
financial account.
In the case of current account, this statement is the record of direct payments and
international trade. The capital account includes financial transactions which do not impact
nation’s economic output. Lastly, the financial account transacts the variation in international
ownership of assets.
The economic issue which is considered in this case is Globalisation. The issue impacts
two components of balance of payments which are current and capital account. The current
account of BOP is related with the balance of goods and services which states that there must be
sustained balance must be maintained between import and export of goods and services. This
balance is highly impacted by globalisation (Lanzafame, 2014). In recent years, Australia has
experienced global commodities boom; this boom was the result of increased globalisation
activities. This global boom resulted in current account deficit in which percentage of import of
goods and services exceeds the percentage of export of goods and services.
Another component which is affected by globalisation is capital account. Capital account
data was reported as 179.000 AUD in December 2019; this data was decreased from the data of
September 2019 <https://www.ceicdata.com/en/australia/bpm6-balance-of-payment-summary/
bop-capital--financial-account-capital-account>. This decreased shows the deficit in capital
account which is raised due to the issue of globalisation. Due to globalisation, Australia is
engaging in more import activities of procuring capital investments than export activities due to
which capital account of BOP is facing a deficit.
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Exchange rate
Exchange rate refers to a rate at which one currency can be exchanged for another currency
(McCombie and Thirlwall, 2016) (McLean, 2012). Australia has floating exchange rate policy in
which currency price of Australia is set by the foreign exchange market of this country which is
based upon the supply and demand of other currencies. In this policy, government entirely
determines the exchange rate against which Australian currency can be exchanged by other
currencies.
Globalisation is a concept which helps a country to trade internationally. Due to
globalisation, the trading competition has raised in entire Australia. There are various industries
such as mining and auto mobile industry which is facing severe competition as international
organisation has developed a base in Australia. Due to this increased competition, all
organisation competes to acquire a competitive edge by selling their products at competitive
prices. These low prices of commodities have influenced the Australian dollar and this currency
has dropped to its lowest level in 10 years.
Both depreciation and appreciation has direct and indirect effects on Australian economy
growth. When the Australian dollars depreciates, all the produced goods and services becomes
cheaper which positively impacts economy but when the goods and services becomes highly
cheap, it leads economy towards deflation situation which degrades economic growth.
Appreciation of Australian dollar have an exact opposite impact and results into inflation in the
economy of Australia (Murphy, 2017).
CONCLUSION
From the above report, it has been concluded that globalisation is an economic issue for
Australia as it has resulted in increase of imports over exports. This issue impacts the currency of
Australia as well due to which situation of inflation is experienced by this economy. The above
report summarises various economic concepts from which it has been found that BOP is the
balance of payments which is important for Australia to maintain to be saved from the situation
of high deficit and surplus. It has been also concluded that cost benefit analysis helps in
analysing the opportunity cost and evaluate the options which are available to provide benefit to
the economy.
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REFERENCES
Books and Journals
Baker, D., Merkert, R. and Kamruzzaman, M., 2015. Regional aviation and economic growth:
cointegration and causality analysis in Australia. Journal of Transport Geography. 43.
pp.140-150.
Daley, J. and Wood, D., 2015. Fiscal challenges for Australia. Grattan Institute.
Gregory, R.G. and Smith, R.E., 2016. 15 Unemployment, Inflation and Job Creation Policies in
Australia. Inflation and Unemployment: Theory, Experience and Policy Making. p.325.
Kirchner, S., 2013. Strengthening Australia's Fiscal Institutions. Centre for Independent Studies.
Lanzafame, M., 2014. The balance of payments-constrained growth rate and the natural rate of
growth: new empirical evidence. Cambridge Journal of Economics. 38(4). pp.817-838.
McCombie, J. and Thirlwall, A.P., 2016. Economic growth and the balance-of-payments
constraint. Springer.
McLean, I.W., 2012. Why Australia prospered: The shifting sources of economic growth (Vol.
43). Princeton University Press.
Murphy, C., 2017. Optimal fiscal equalisation and its application to Australia (No. 2017-12).
Online
Australian Institute of International Affairs. 2020. [Online]. Available through:
<http://www.internationalaffairs.org.au/australianoutlook/ken-henry-australia-and-
globalisation/>
Fiscal Policy of Australia. 2020. [Online]. Available through:
<http://www.jaconline.com.au/econdownunder/downloads/5E/chap03.pdf>
Microeconomic Reform in Australia. 2020. [Online]. Available through:
<https://www.pm.gov.au/media/new-measures-delivering-deregulation-australian-
business>
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