Australia's Economic Relations

This assignment explores Australia's complex and interconnected economic relationships on a global scale. Students are tasked with analyzing various aspects such as bilateral trade with countries like China and the US, the impact of exchange rates on Australian exports, the role of foreign direct investment (FDI) in stimulating growth, and the influence of global commodity prices on the Australian economy. The assignment utilizes data from reputable sources like the World Bank, IMF, and Australian Bureau of Statistics to provide a comprehensive and evidence-based analysis.

Running head: ECONOMICS
Economics
Name of the Student
Name of the University
Author note

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Table of Contents
Introduction......................................................................................................................................2
Relation between USA and Australia..............................................................................................3
Bilateral Economic Relation........................................................................................................3
A close look over the direction of relation and power of nations....................................................4
Critical Analysis..............................................................................................................................5
Exchange rate and trade balance..................................................................................................7
Foreign investment and movement of interest rate....................................................................10
Great Recession in USA and its impact.....................................................................................13
Conclusion.....................................................................................................................................15
References......................................................................................................................................16

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Introduction
The aspect of globalization increases the intensity of trade relation on international
platform. No country is self-sufficient. Countries engage in trade relation to import goods and
services, producing which is comparatively disadvantageous for them. Countries export goods in
which they enjoy comparative advantage and can produce in excess of their domestic demand.
In such trade relations, the economies having trade relation become dependent on each other.
Shocks in export or import demand affect the countries engages in trade. The advent of advanced
technology increases mobility of goods and services and factors of production as well. Therefore,
the definition and spectrum of trade have changed.
Now a day, countries establish trade relation with more than one nation with different
weight given on trade basket. New trade avenues have been opened up. In modern world,
Countries are being interconnected in an intensive way. This increases both the advantages and
complexity of trade policies designed in a country. Any change in the existing trade policy is
associated with a change in trade scenario and hence affects its trading partners. Several factors
affect the volume. Exchange rate is one crucial factor determining the term of trade. The report
critically evaluates trade relation between Australia and United States.
In trade relation between a large and a comparatively small country, small country always
dominated and affected more by the policy change in the large country. The paper critically
reviewed the impact of real GDP in USA on Australian economy because of their trading
relation and size of USA economy is bigger than Australian economy. Dynamic movement of
both the economy from 1985 to recent time is analyzed.

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Relation between USA and Australia
Globally there are different countries involve in bilateral or multilateral trade relation
with one another. The power of the countries to dominate the international market depends on
relative size of the economy. Two countries significantly participating in global trade are United
States of America and Australia. These two countries have considerable trade volume when one
to one trade relation is considered. Trade relation automatically builds socio economic and
political relation among nations. The framework of fiscal and monetary policy now has impact
on the global economic environment (Leamer and Storper 2014). There is an interesting
dynamics of trade relation and relation in other economic aspects between USA and Australia.
The trade relation of USA and Australia went on stronger with passes of time. Strong
trade relation works as a complementary factor in growth of involved nations. USA is one of the
top ten trading partners of Australia. Australia largely depends on its external sector. This is
partly influenced by its relatively small size. USA offers fourth largest export market to
Australia. Australia also imports necessary products from United States.
Bilateral Economic Relation
The Free Trade agreement between USA and Australia has boosted bilateral trade
relation. The export from USA to Australia has increased over 100 percent since its beginning at
2005 (Dittmer and He 2014.). Total goods and services in US traded with Australia amounts to
$65 billion in 2015. USA manages to maintain a trade surplus of $29 billion. The export of USA
supports nearly 250,000 jobs in Australia in different sectors such as travel services, consumer
goods, machinery and financial services. In exchange, Australia exports foods, industrial

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material, supplies, and financial services. Bilateral investment amounts to above $1 trillion.
Australia invested $440 billion in the overseas market of United States. USA is the largest
foreign investor of Australia and hence, dominates Australian stock market (Baylis, Owens and
Smith 2017).
The Free Trade agreement contributes in strengthening the economic and socio political
relation of the two nations. Both the nations are counted in the list of world developed nations.
However, when comes in comparison the size of USA economy is bigger than Australia and
hence, assistance provided by USA to Australia helps Australia to have an prosperous economy.
A close look over the direction of relation and power of nations
Trade relation and analysis of dominance direction is always been an interesting area of
research for the economist and policy makers. There are ongoing debates on the relation
dynamics. The amount of investment USA made in Australia is much bigger than the same in
opposite way. Australia depends on USA for a majority of imports. USA also imports goods
from Australia and henceforth providing a large export market to Australia. USA maintains a
multilateral trade relation with other big nation as well rather than depending only on Australian
suppliers (Baldwin and Lopez‐Gonzalez 2015). USA is always claimed to have the most
influencing economic power in global scenario. Economic policies and strategies taken by this
single nation affect other nations standing on the same platform. This paper evaluates how the
change in USA economy has impacted on overall Australian economy.
Gross domestic product is a measure for monetary value of national output. When base
year market prices are used for computing GDP then it is called real GDP. Growth in real GDP is

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an indicator of economic growth. Change in real GDP means a change income and hence a
changing dynamics of demand. Now, in times of strong trade dependence real GDP change
affects the dependent nation through varying demand of import and export (Grover, Kliesen, and
McCracken 2016). The other related indicators that need to be evaluated before reaching and
conclusion are movement of exchange rate, interest rate, growth of net export (Export – Import).
Many commentators are of belief that changing dynamics of real GDP statistics have
considerable influence on Australian GDP as well through its impact on net export term and can
cause expansion or contraction of Australian economy. The rationale for such thoughts is USA is
a big player in international economies than Australia. Those having optimistic view cannot
support this claim. To draw any final conclusion a comparative analysis on historical data on
different indicators is needed. This is done in the next section of the paper.
Critical Analysis
The economic indicators of both the nations are evaluated for a significantly long period
(1985-2015/16). Larger the time pan clearer is the picture. The Analysis starts with comparison
of USA and Australian’s real GDP for the selected time period. If GDP of both the nation move
in same direction then a relation can be traced between the two nations. There are two channels
through which foreign countries can affect GDP of the domestic economy. One is trade balance
or net export and other is foreign investment (Pagan and Wilcox 2015). Net export depends on
the exchange rate while foreign investment depends on interest rate.
GDP of Australia and USA

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Figure 1: Real GDP growth rate in USA and Australia
(Source : tradingeconomics.com)
As shown in figure 1, the economy of USA and Australia had experienced fluctuations in
its growth statistics. There are some common points of peak and depression in both the nation
(Betz et al. 2013). For example, in 1992 both USA and Australia had experienced a decline in
the growth rate. Another common point of decline is in between 2009 and 2010. However, the
intensity of a declining growth is more severe in United States than that in Australia. In 1992, the

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growth rare in Australia is less than -1 where that in USA is almost closer to -5. In the next
declining phase, that is in 209-2010 growth rate in Australia is though declined but remain
positive but that in USA is closer to -10. This shows though some similarity in GDP movement
is found between the two nations, the intensity is not much. During 1997-98 both the economy
had experienced an increase in the growth rate. In 2003 also there was a rising growth trend.
Exchange rate and trade balance
The movement of GDP depends on its different components that again depend on a
number of factors. Economy of USA and Australia is related in terms of investment and trade,
both having impact on GDP and determines health of the economy. When export exceeds import
then trade balance is positive and when import exceeds export then trade balance is negative.
Demand for export and import is determined in terms of the prevailing exchange rate between
countries (Ferraro, Rogoff and Rossi 2015). Exchange rate is the relative price of currencies.
Movement of exchange rate of US dollar to Australian dollar is expressed in the following
figure.
Figure 2: Trend in exchange rate between US dollar and Australia
(Source: stlouisfed.org 2017)

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A volatile movement of exchange rate is found between the two countries. When
exchange rate of US dollar to Australian dollar is high then it is cheaper for the Australian to
export from USA as they have to pay less Australian dollar for one unit of US dollar. Opposite is
the case for low exchange rate. The direct impact of exchange rate is on volume of export import
and on the trade balances (Bussière, Delle Chiaie and Peltonen 2014.). The statistics for US trade
of goods with Australia and corresponding trade balance is expressed in the following table
Year Export Import Trade Balance
1985 5,440.40 2,836.30 2,604.10
1986 5,551.10 2,627.70 2,923.40
1987 5,494.80 3,005.50 2,489.30
1988 6,972.90 3,541.40 3,431.50
1989 8,331.30 3,872.90 4,458.40
1990 8,537.70 4,446.60 4,091.10
1991 8,403.80 3,988.00 4,415.80
1992 8,875.90 3,687.60 5,188.30
1993 8,276.70 3,297.30 4,979.40
1994 9,780.60 3,202.10 6,578.50
1995 10,789.10 3,323.00 7,466.10
1996 12,008.40 3,868.90 8,139.50
1997 12,062.90 4,602.30 7,460.60
1998 11,917.50 5,387.00 6,530.50
1999 11,818.30 5,280.10 6,538.20
2000 12,482.40 6,438.00 6,044.40
2001 10,930.50 6,477.80 4,452.70
2002 13,084.90 6,478.80 6,606.10
2003 13,087.60 6,413.70 6,673.90
2004 13,957.90 7,545.50 6,412.40
2005 15,588.50 7,342.20 8,246.30
2006 17,545.70 8,204.00 9,341.70
2007 19,178.20 8,615.00 10,563.20
2008 22,218.60 10,588.80 11,629.80
2009 19,599.30 8,011.50 11,587.80
2010 21,804.60 8,582.90 13,221.70

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2011 27,626.20 10,242.90 17,383.30
2012 31,161.40 9,566.80 21,594.60
2013 26,123.70 9,272.60 16,851.10
2014 26,681.70 10,697.30 15,984.40
2015 25,034.10 10,883.50 14,150.60
2016 22,159.70 9,509.90 12,649.80
Table 1: Import, export and trade balance of US with Australia
(Source: census.gov 2017)
Over the years US export a considerable volume of export to the Australian market. The
import volume from Australia is less keeping the trade balance positive over the entire range.
The export has increased significantly with passes of time. Import though increases but at a very
low rate. The data shows Australia’s dependence on USA for export market has increased at a
slower pace than its import.
Figure 3: Trend in US trade Balance with Australia
(Source: census.gov 2017)
Balance of trade of USA with Australia had increased overtime, reaching peak in 2010.

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Foreign investment and movement of interest rate
Investment relation between USA and Australia is quite strong. USA is one of the top
foreign investors in Australia. Many of the biggest American investors invest in Australian
market.
Figure4: foreign investment share in Australia
(Source: abs.gov.au 2017)
Figure 5: Foreign Investment in Australia
(Source: abs.gov.au 2017)

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Figure 6 : Share of Australian Investment Abroad
(Source: abs.gov.au 2017)
The set of figures given above in indicates that in terms of FDI flows the relation between
USA and Australia runs in both ways. USA not only have the highest foreign investment share in
Australia’s market but also is provides invest5mjent opportunities to Australian fund. Australia
enjoyed significant FDI assistance from USA and also enjoyed return from investing in USA.
Henceforth, prosperity and health of the Australian economy largely depend on USA. A decline
in growth rate in USA might have impact on Australian economy through FDI flows
(Hertenstein, Sutherland and Anderson 2017). However, the assertion that given the size of USA
economy, Australian economy in vulnerable to shocks in USA economy needs to evaluated in
light of investment and growth scenario in both the economy.
The driving factor behind FDI flows is the domestic and foreign investment. Investors
invest in foreign countries only when interest rate is high and stable. When interest rate is high

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then it implies a higher value for domestic currency and entails a positive impact on the
exchange rate. Volatility of exchange rate and interest rate dynamics should be studied to
examine whether USA economy has really any impact on Australian economy.
Figure 7: Australian dollar volatility and interest rate volatility
(Source: abs.gov.au 2017 )
From the figure a surprising result is obtained. As the economic theory suggests relative price of
currencies should be abide by the interest rate (Esposto and Fien 2016). However, the figure
show movement in Aust6ralain dollar value and interest rate are independent in nature. The
interest and exchange rate though both fluctuate over time; there is no common point of
fluctuation.

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There is real life economic phenomenon that supports the findings. One major event is the great
recession of USA that took place during 2007-2008 and affect USA economy along with
economies of other nations (Thorpe and Leitão, 2014).
Great Recession in USA and its impact
The Great recession in USA was resulted from bursting of bubbles in the housing market.
There was an economy wide downturn during this time and affects the confidence of investors in
the global market. Real GDP in USA had obviously declined. Australia, being prime trade
partners of USA was expected to be affected the most from the recession. However, the
expectation was not fulfilled as Australia affected very little from the wave of recession
(Riumallo-Herl et al. 2014). Housing prices in Australia, domestic interest rate and overall
investment remained almost stead during this phase.
Figure 8: Inter country comparison of housing prices
(Source: abs.gov.au 2017) )

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From 2008 there was a significant downfall in housing prices in United States while the inflation
adjusted housing price in Australia rose up steadily (Ball 2014).
Figure 9 : fluctuation of interest rate among different countries
(Source: state.gov 2017 )
In times of recession interest rate in USA steadily went down. The same trend has also
been observed for Europe and Japan also. However, the performance of Australia in this regard
is well as compared to other nations. The performance of Australian economy is partly
influenced by the growth of financial sectors (Baffes et al. 2014). The rest can be contributed
from an improving terms of trade for Australian economy with rest of the world. Previously
Australia depended heavily on USA for maintaining balance in its sector. With passes of time the
economy grows strength and establishes multilateral trade relation rather that depending only on
bilateral trade. This makes Australian Economy less vulnerable to shock in any one economy and
helps to maintain economic stability.

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Conclusion
The report critically evaluates the assertion that change in real GDP of USA is ca driving
factor for expansion or contraction of Australian economy because of their trading relation. In
doing so the dependency of both the nation in terms of trade and investment are analyzed and
validated in terms of historical data. There are some common fluctuating points in real GDP
growth rate between USA and Australia. However, the factors affecting the fluctuations care
different. Net export and Investment are important components of GDP. USA export in Australia
has increased significantly and results in a positive t6rade balance. While looking into interest
and exchange rate volatility of Australian dollar an independent relation is obtained. Moreover,
the recession in USA in 2007-2008 did not have much impact on Australian economy as it w2as
expected to be. This suggests though USA is a major trade partner of Australia and an attractive
investment destination, it is not totally exposed to the risk or shocks of USA economy.

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