Relationship between Real GDP, Inflation, Unemployment, Business Cycle and Net Exports in Australia

This article explores the relationship between Real GDP, Inflation, Unemployment, Business Cycle and Net Exports in Australia. It analyzes the fluctuations and trends of these macroeconomic indicators over the years and their impact on the overall economic well-being of the country and its residents.

Running head: ECONOMICS ASSIGMENT
Economics Assignment
Name of the Student
Name of the University
Author Note

1ECONOMICS ASSIGNMENT
Table of Contents
Real GDP Growth Rate and Rate of Inflation, Australia...........................................................2
Unemployment Rate and Growth Rate of Real GDP, Australia................................................3
Presence of Business Cycle in the economy..............................................................................3
Real Exchange Rate and Net Exports........................................................................................4
References..................................................................................................................................6

2ECONOMICS ASSIGNMENT
Real GDP Growth Rate and Rate of Inflation, Australia
The Real GDP of a country, being the inflation adjusted measure of the total
productivity of the country, is one of the primary indicators of economic well-being of the
population in general and the health of the economy of the country. It measures the total
value of the final goods and services which are produced within the geographical boundaries
of the concerned country (Mankiw 2014). On the other hand, the rate of inflation denotes the
changes in the average price levels of a country and is another significant indicator of overall
well-being of the economy of the country as it highlights the conditions of the overall price
levels of the goods and services consumed in the economy, thereby indicating towards the
overall welfare of the residents of the same.
Keeping this into consideration, the relationship between the Real GDP Growth Rate
and the rate of inflation in case of one of the most significantly developed economies across
the globe, that is the economy of Australia, can be seen as follows:
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
-15.00
-10.00
-5.00
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00
Rate of Inflation and Real GDP Growth Rate, Australia
GDP Growth Rate Inflation Rate
Figure 1: Inflation and Real GDP Growth Rate (Australia), 1990-2016
(Source: Abs.gov.au 2018)
As is evident from the above figure, the Growth Rate in the Real GDP of Australia,
over the last few decades, have been subjected to considerable fluctuations and these
fluctuations have been negative and positive top. The growth rate reached negative values in
1993, 1998, 2001 and also in 2009, the last being mostly due to the Global Financial Crisis
which had immense negative impact on the overall economic condition of the country. The
Real GDP Growth Rate of the country can also be seen to be remaining negative from2014
till 2016. Again, impressive positive trends can also be observed in the years 1994-1997,
2002-2007 and also in 2010, the latter showing the fast recovery of the economy from the
recessionary situations of 2008-2009 (Kumar, Webber and Perry 2012).
Like that of the growth rate of Real GDP, the rate of inflation shows high fluctuating
trends and can be seen to be maintaining a more or less moderate range of values (mostly
between 1% to 4%) over the concerned period of time. However, in the periods of high GDP
growth rate, the inflation can also be seen to be increasing to some extent.

3ECONOMICS ASSIGNMENT
Unemployment Rate and Growth Rate of Real GDP, Australia
Another significant macroeconomic indicator for the well-being of any country’s
economy id the rate of unemployment in the same as much of the job creation, purchasing
power, aggregate demand and production in the economy depends on the same. In general, as
per the Okun’s Law, with 1% decrease in the GDP, the unemployment increases by 2%.
Keeping this into consideration, the relationship between Real GDP and unemployment rate
in Australia, can be seen as follows:
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
-15
-10
-5
0
5
10
15
20
25
30
35
0
2
4
6
8
10
12
Rate of Unemployment and Real GDP Growth Rate
GDP Growth Rate Unemployment Rate
Figure 2: Real GDP Growth Rate and Unemployment Rate (Australia), 1990-2016
(Source: Abs.gov.au 2018)
The Okun’s Law cannot be seen to be always applicable in the economic scenario of
Australia, as can be seen in 1990-1991, when both the variables can be seen to be increasing.
However, in the period 2001-2004, the GDP can be seen to be increasing while the
unemployment rate can be observed to be decreasing which in turn asserts the Okun’s Law.
The fluctuations of the rate of unemployment can however be seen to be much more damped
than that of the fluctuations in the Real GDP Growth Rate of the country.
Presence of Business Cycle in the economy
The business cycle in an economy, in general, refers to the alternate phases of
expansions and contractions of the economic growth dynamics, which the country
experiences naturally over time, which can be seen as follows:

4ECONOMICS ASSIGNMENT
Figure 3: Business Cycle
(Source: As created by the author)
In case of Australia, the economy can be seen to be expanding in 2001-2004 and also
in 2006-2008, while the growth can be seen to be declining in the 2008-2009, much of which
can be attributed to the Global Financial Crisis occurring during that period. Together these
dynamics assert the presence of business cycle in the economy of Australia (Galí 2015).
Real Exchange Rate and Net Exports
The real exchange rate of the currency of a country shows the real purchasing power
of the concerned country, in terms of the goods and services of the other country in
comparison. In general, the exchange rate of the currency of a country is measured by
keeping the currency of the United States, that is, the US dollar. On the other hand, the net
exports of a country, being a component of its GDP, shows the total value of the exports less
the imports value and the same is one of the significant indicators of total income flow and
economic wellbeing of the country (McLean 2012). In general, with the increase in the value
of the domestic currency of a country, the imports become cheaper, thereby increasing and
vice versa. Keeping this into consideration, the relationship between the net exports of
Australia with that of the exchange rate of the AUD in terms of USD can be seen as follows:

5ECONOMICS ASSIGNMENT
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
-30.00
-25.00
-20.00
-15.00
-10.00
-5.00
0.00
5.00
10.00
15.00
20.00
0.00
0.50
1.00
1.50
2.00
2.50
Net Exports and Exchange Rate
Net Exports Exchange Rate
Figure 4: Net exports and Real exchange rate of AUD in terms of USD
(Source: Abs.gov.au 2018)
The net exports of Australia can be seen to be mostly negative and highly fluctuating
over the years. Australia, in terms of global exports volume, ranks 23rd. However, the country
is one of the largest importers of the world, mainly importing technological commodities,
petroleum, automobiles and others. The export basket on the other hand, mainly comprises of
minerals, natural gas and others. However, the real exchange rate of the country can be seen
to be comparatively stable in terms of the rate of change in the same (McLean 2012).
Nevertheless, it can be seen that a relationship does exist between the two concerned
variables as the increase in the real exchange rate of AUD in terms of USD can be seen to be
accompanied by a fall in the net exports, which can be attributed to the increase in the volume
of imports in the country. Also, in 2011, the net exports of the country can be seen to be
positive which can be seen to be accompanied by a negative exchange rate, which asserts the
theoretical relationship between the two concerned variables.

6ECONOMICS ASSIGNMENT
References
Abs.gov.au (2018). 1345.0 - Key Economic Indicators, 2018. [online] Abs.gov.au. Available
at: http://www.abs.gov.au/AUSSTATS/abs@.nsf/mf/1345.0?
opendocument#LabourForceandDemography [Accessed 23 May 2018].
Abs.gov.au (2018). 5206.0 - Australian National Accounts: National Income, Expenditure
and Product, Dec 2017. [online] Abs.gov.au. Available at:
http://www.abs.gov.au/ausstats/abs@.nsf/mf/5206.0 [Accessed 23 May 2018].
Abs.gov.au (2018). 5368.0 - International Trade in Goods and Services, Australia, Mar
2018. [online] Abs.gov.au. Available at:
http://www.abs.gov.au/ausstats/abs@.nsf/0/A5FB33BD2E3CC68FCA257496001547A1?
Opendocument [Accessed 23 May 2018].
Abs.gov.au (2018). 6401.0 - Consumer Price Index, Australia, Mar 2018. [online]
Abs.gov.au. Available at:
http://www.abs.gov.au/ausstats/abs@.nsf/0/938DA570A34A8EDACA2568A900139350?
Opendocument [Accessed 23 May 2018].
Galí, J., 2015. Monetary policy, inflation, and the business cycle: an introduction to the new
Keynesian framework and its applications. Princeton University Press.
Kumar, S., Webber, D.J. and Perry, G., 2012. Real wages, inflation and labour productivity in
Australia. Applied Economics, 44(23), pp.2945-2954.
Mankiw, N.G., 2014. Principles of macroeconomics. Cengage Learning.
McLean, I.W., 2012. Why Australia prospered: The shifting sources of economic growth.
Princeton University Press.