2ECONOMICS ASSIGNMENT Executive summary: Australian economy is one of the largest mixed economy around the world that has been growing through the last three decade by a high rate. Australia has been going through its 27thconsecutive year of growth, which is mainly driven by the robust performance of the agricultural and mining sector. Though the Australian economy has been rising, however, the Real GDP growth rate of the state has been falling over the last few years. Under this scenario, this report is aimed to analyse various macroeconomic factors that are being affected by the change in the Real GDP growth of the Australian economy. Through this analysis, it will try to provide insight, how the Australian economy has been growing through the last few years and how the economy will be within next few years. From the discussion it has been found that the Australian economy is one of the largest mixed economy in the world where all the sectors of the economy has participated by a large share in the structuring of the domestic economy. Moving forward the report has found that the state as of now is going through the growth stage, where its various macroeconomic factors are expanding by a large extent. The report suggest that in order to gauge the present situation and make the future of the Australian economy more stable, it is necessary for the Australian government to bring in strategies that can aid the Australian export market and aid it to become the largest exporter of the natural resources like coal and others. To conclude it can be stated that the economy has high potential to become one of the largest economy around the world with its large amount of domestic market and the favourable trading conditions.
3ECONOMICS ASSIGNMENT Table of Contents Introduction:...............................................................................................................................4 Connection between inflation rates along with Australia’s Real GDP growth rate:..................4 Unemployment and Real GDP growth rate connection:............................................................6 Evidence of the business cycle:..................................................................................................7 Relationship between Real exchange rates and net exports of the USA and Australia:............8 Connotation between Cash rates and the Fed rates:.................................................................10 How movements in the Federal Reserve Fund’s rates drive movements in the Cash rates:....11 Macroeconomic outlook of Australia:.....................................................................................12 Conclusion:..............................................................................................................................13 Reference:................................................................................................................................15 Appendix:.................................................................................................................................17
4ECONOMICS ASSIGNMENT Introduction: Australian economy is one of the largest mixed economy around the world that has been growing through the last three decade by a high rate. With almost 8.9 trillion USD Gross Domestic Product (GDP), Australian economy is acknowledged as one of the fastest growing developed nation that has good amount of performance from all of its macroeconomic factors (Bramble 2015). As per the nominal GDP Australia ranks 19thand when it comes to the Purchasing Power Parity, then it ranks 13thamong all the nations around the world making it an ideal state where the economic factors are performing as per the requirement of the state (Poon 2017). Australia has been going through its 27th consecutive year of growth, which is mainly driven by the robust performance of the agricultural and mining sector. In addition to this service sector of the Australian economy has aided the economy to become where it now and the secondary sector has helped the Australian economy to become strong that can withstand against the market crunches (Robinsonet al.2015). Australian economy has been rising, however, the Real GDP growth rate of the state has been falling over the last few years. Under this scenario, this report is aimed to analyse various macroeconomic factors that are being affected by the change in the Real GDP growth of the Australian economy. Through this analysis, it will try to provide insight, how the Australian economy has been growing through the last few years and how the economy will be within next few years. To conclude it will provide a brief overview of the findings and portray the recommendation to deal with the situation of the Australian economy. Connection between inflation rates along with Australia’s Real GDP growth rate: In case of the Australian economy, there lies a negative relation between the Real GDP growth rate of Australia and the inflation. As the state has been facing rise in Real GDP growth rate, in inflation over the years has fell gradually (Mathews 2017).
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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 -1.00 0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 GDP growth rate v/s Inflation Real GDP growth rateInflation Figure 1: Paired graph of Real GDP growth rate of Australia and inflation Source: (Data.worldbank.org 2018) Figure 1 depicts the fall in the inflation with the rise in the Real GDP growth rate. As it can be seen that, with the rise in the Real GDP growth rate, there has been fall in the inflation rate over the years. Real GDP growth rateInflation Mean3.109932627Mean2.732796669 Standard Error0.24101285Standard Error0.28705022 Median3.58250613Median2.550171203 Mode#N/AMode#N/A Standard Deviation1.228929223Standard Deviation1.463674675 Sample Variance1.510267035Sample Variance2.142343555 Kurtosis1.661107682Kurtosis2.470008883 Skewness-1.224794167Skewness1.119182718 Range5.382126182Range7.021842692 Minimum-0.375372306Minimum0.250417362 Maximum5.006753877Maximum7.272260054 Sum80.85824831Sum71.05271339 Count26Count26 Table 1: Summary statistics of Real GDP growth rate of Australia and inflation Source: (Created by Author)
6ECONOMICS ASSIGNMENT Table 1 and 2 highlights the phenomenon that with the rise in the Real GDP, there has been fall in the inflation as the price of the goods and services eventually fell with the rise in the potential of production of the Australian economy (Tung and Thanh 2015). Real GDP growth rateInflation Real GDP growth rate1 Inflation-0.0308130911 Table 2: Correlation between the Real GDP growth rate of Australia and inflation Source: (Created by Author) Unemployment and Real GDP growth rate connection: In case of the Australian unemployment and the Real GDP growth, there is also a negative relationship as with the rise in the country’s growth, more job creation has been there, which has aided it to reduce the unemployment. 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 -2.00 0.00 2.00 4.00 6.00 8.00 10.00 12.00 GDP growth rate v/s Unemployment Real GDP growth rateUnemployment Axis Title Axis Title Figure 2: Paired graph of Unemployment and Real GDP growth rate connection Source: (Data.worldbank.org 2018) From the figure 2, it can be seen that, with the rise in Real GDP of the economy, there has been sharp fall in the inflation rate over the years. Real GDP growth rateUnemployment Mean3.109932627Mean6.758461494 Standard Error0.24101285Standard Error0.376066964 Median3.58250613Median6.180000067 Mode#N/AMode#N/A
7ECONOMICS ASSIGNMENT Standard Deviation1.228929223Standard Deviation1.917572789 Sample Variance1.510267035Sample Variance3.677085402 Kurtosis1.661107682Kurtosis-0.294397285 Skewness-1.22479417Skewness0.82510807 Range5.382126182Range6.639999866 Minimum-0.37537231Minimum4.230000019 Maximum5.006753877Maximum10.86999989 Sum80.85824831Sum175.7199988 Count26Count26 Table 3: Summary statistics of Unemployment and Real GDP growth rate connection Source: (Created by Author) From the figure 3 and 4, it can be found that Australian economy has been facing negative relationship between the Real GDP growth rate and the unemployment rate. As the economy moves forward, more job has been created leading to fall in the unemployment rate (Mathews 2017). Real GDP growth rate Unemployment Real GDP growth rate1 Unemployment-0.134211 Table 4: Correlation between Unemployment and Real GDP growth rate connection Source: (Created by Author) Evidence of the business cycle: Business cycle is one of the essential macroeconomic ideas that provides ability to deal with the unexpected market crunches. As per the theory of the business cycle, there are five stages in the growth path of an economy, which are expansion, peak, recession, contraction and tough period (Kydlandet al.2016). In the cyclical manner these five phases tends to appear in all the economies and following the trend, policymakers can keep themselves well aware of the phenomenon. Under the business cycle theory, expansion stage comes into action, when the state is rising and it reaches peak, when all the economic factors are performing at their best. Post the peak period, there comes the recession, when the price of the good and services start to rise. Flowing this comes the contraction, when the productivity of the economy falls and lastly there is tough period, where the productivity
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8ECONOMICS ASSIGNMENT falls to its lowest point and other macroeconomic variables like unemployment, inflation reaches to their max point (Vegh and Vuletin 2015). 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 -1.00 0.00 1.00 2.00 3.00 4.00 5.00 6.00 Real GDP growth rate Figure 3: Real GDP growth rate of Australia Source: (Data.worldbank.org 2018) Considering these phenomenon it can be said that Australian economy has been going through the expansion stage as the economy has been facing large amount of shift in its GDP rate. As the figure 3 depicts, Real GDP of the economy has been increasing at a moderate rate highlightingthefactthatithasbeengoingthroughthegrowthstage,wherethe macroeconomic factors like export, employment has been rising contrary to the fall in the unemployment rate and the inflation (Murray 2017). Relationship between Real exchange rates and net exports of the USA and Australia: In case of the Real exchange rates and net exports of the USA and Australia, there lies a negative relationship. As the real exchange rate of Australia rises it leads to fall in the net export owing to the fall in the demand of the Australian goods and services in the US market (Nevile 2016).
9ECONOMICS 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 -720.00 -640.00 -560.00 -480.00 -400.00 -320.00 -240.00 -160.00 -80.00 0.00 80.00 160.00 240.00 320.00 Net export v/s Reac exchange rate Net exportReal exchange rate Figure 4: Paired graph of Real exchange rates and net exports of the USA and Australia Source: (Data.worldbank.org 2018) From the figure 4, it can be seen that with the small fluctuation in the real exchange rate, there has been large amount of shift in the net export of Australia. Net exportReal exchange rate Mean-16.46833282Mean84.23797855 Standard Error27.64978216Standard Error2.458253247 Median-2.159687892Median84.08738695 Mode#N/AMode#N/A Standard Deviation140.9867788Standard Deviation12.53468128 Sample Variance19877.27179Sample Variance157.1182347 Kurtosis16.96395717Kurtosis-0.632789153 Skewness-3.537881454Skewness0.571172065 Range872.0743375Range43.2786843 Minimum-643.1317393Minimum66.6071117 Maximum228.9425982Maximum109.885796 Sum-428.1766532Sum2190.187442 Count26Count26 Table 5: Real exchange rates and net exports of Australia and USA Summary statistics Source: (Created by Author) Net exportReal exchange rate Net export1 Real exchange rate-0.0539894621
10ECONOMICS ASSIGNMENT Table 6: Real exchange rates and net exports of Australia and USA Correlation Source: (Created by Author) As the table 5 and 6 depicts, there has been negative relationship between the net export and the Australian exchange rate and the mean of both highlights the same (Cole and Nightingale 2016). Connotation between Cash rates and the Fed rates: There has been strong relationship between the Fed rate and Cash rate, however, it changed post 19thcentury. With the rise in the Fed rate, since then, Cash rate started to fall and vis-à-vis (Downeset al.2014). 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 0.00 2.00 4.00 6.00 8.00 10.00 12.00 Cash rate v/s Fed rate Cash rateFed rate Figure 5: Paired graph of cash rate and Fed rate Source: (Data.worldbank.org 2018) As it can be seen from the figure 5, cash rate as of now is rising, whereas the Fed rate is falling showcasing inverse relationship between these two factors. Cash rateFed rate Mean5.337869Mean3.950124 Standard Error0.494889Standard Error0.394121 Median5.186772Median3.710091 Mode#N/AMode#N/A Standard Deviation2.523448Standard Deviation2.009632 Sample Variance6.36779Sample Variance4.03862 Kurtosis-0.80674Kurtosis-1.46052
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11ECONOMICS ASSIGNMENT Skewness0.194363Skewness0.161517 Range9.024177Range6.029477 Minimum1.044141Minimum1.161394 Maximum10.06832Maximum7.190871 Sum138.7846Sum102.7032 Count26Count26 Table 7: Summary statistics of Cash rate and Fed rate Source: (Created by Author) From the table 7, it can be perceived that mean cash rate is 5.33, whereas the mean Fed rate is 3.95. With the deviation of 2.52 and 2.09 for the Cash rate and Fed rate respectively,botharestable,however,Cashratehasbeenfacinghighestamountof fluctuation in recent days between these two indicators (Apergis 2014). How movements in the Federal Reserve Fund’s rates drive movements in the Cash rates: Australian cash rate and the US Fed rate are closely related with the each other. Historically there has been a trend to follow the Fed rate while adjusting the cash rate, however during the late 90s the phenomenon changed (Hartnett and Romcke 2015). Cash rateFed rate Cash rate1 Fed rate0.3846061 Table 8: Correlation between the Cash rate and Fed rate Source: (Created by Author) Presently, Cash rate moves to the opposite direction of the Fed rate that means, as the Fed rate rises, Cash rate falls leading to rise in the difference between both. Depending upon the market stability, Australian government believes that lower cash rate will gain much amount of investment. As per the table 8, it can be envisaged that, with the rise in the Fed rate, there will be rise in the Cash rate by 38% that highlights the level of association between
12ECONOMICS ASSIGNMENT these two variables (Bhutta and Keys 2016).Thus as the Fed rate moves higher, Cash rate remains at low point, however, it changes marginally in the same direction. Macroeconomic outlook of Australia: Australian economy is acknowledged as one of the largest economies around the world that has been evolving at a large rate since the last three decades. Depending upon its primary and tertiary sector, the economy has become one of the largest nation around the world that has faced rapid growth in GDP and subsequently inflation and unemployment has fell gradually (Caputo and Herrera 2017). Over the year growth in the net export aided by the favourable exchange rate situation has made the country to become where it is now. In order to forecast the economic performance of the Australian economy, following table can be considered (Mirkov and Nativik 2016). Real GDP growth rate Unemplo yment Inflatio n Net export Real exchange rate Cash rate Fed rate Real GDP growth rate 1 Unemployme nt -0.1342094131 Inflation-0.030813091- 0.230120 287 1 Net export-0.1500723010.235574 382 0.13362 0914 1 Real exchange rate -0.25310488- 0.566479 995 - 0.03428 7329 - 0.05398 9462 1 Cash rate-0.1067050840.741757 464 0.05438 5665 0.21111 0842 - 0.21581268 1 Fed rate0.3286283530.441418 055 0.13221 2483 - 0.12504 6333 - 0.67452275 0.38460 6456 1 Table 9: Correlation between the several macroeconomic parameters of Australia Source: (Created by Author) As per the table 9 there has strong relationship between the Real GDP growths with all the macroeconomic factors. With rise in the Real GDP, unemployment, inflation as well as the cash rate tends to fall (Duarteet al.2017).This highlights the fact that, as the
13ECONOMICS ASSIGNMENT Australian economy moves forward while enhancing the Real GDP growth rate, more people gets employed and the price of the goods and servicesin the domestic market fall. Subsequently cash rate falls due to the fact that inflation rate comes under control and the requirement of the foreign investment fells owing to the rise in the private domestic investment. This change in the macroeconomic variable through the change in the Australian Real GDP lead to alteration in the trade balance as well (Hamiltonet al.2016). As the economy moves forward, exchange rate of the economy rises that gives rise to the importable and leads to a fall in the exportable. Under this circumstances, there will be fall in the net export with the rise in the Real GDP growth rate. Considering this feature of the Australian economy, it can be said that the state is expected to become one of the largest economy in the future (Markovicet al.2016). As of now, Real GDP growth rate of the Australian economy has been falling and it will give rise to the net export. With robustly performing agriculture and the mining industry of the state and depending upon the service sector it can become the largest energy exporter in the world by next decade. On the other hand, as the GDP of the state has been rising, it has potential to rank higher as per the sustainability in future (Rey 2016). Presently it is going through the growth stage and the chance of facing another Global Financial Crisis like situation by the state is low due to its versatile economic framework and strong domestic market. Conclusion: From the above discussion it has been found that the Australian economy is one of the largest mixed economy in the world where all the sectors of the economy has participated by a large share in the structuring of the domestic economy. With the robust network of service the economy has gained most of its GDP and when it comes to the primary sector, then it has provided Australia to maintain a strong trade balance. As the economy of the state has been moving forward it has gained much amount of prosperity through the rise in the export and
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14ECONOMICS ASSIGNMENT strong economic quality of the domestic economy. Moving forward the report has found that the state as of now is going through the growth stage, where its various macroeconomic factors are expanding by a large extent. To conclude it can be stated that the economy has high potential to become one of the largest economy around the world with its large amount of domestic market and the favourable trading conditions. In order to gauge the present situation and make the future of the Australian economy more stable, it is necessary for the Australian government to bring in strategies that can aid the Australian export market and aid it to become the largest exporter of the natural resources like coal and others. Proper exposure from the international market can lead the Australian economy to better sustainability and market the economy prosper in coming days.
15ECONOMICS ASSIGNMENT Reference: Apergis, N., 2014. Can gold prices forecast the Australian dollar movements?.International Review of Economics & Finance,29, pp.75-82. Bhutta, N. and Keys, B.J., 2016. Interest rates and equity extraction during the housing boom.American Economic Review,106(7), pp.1742-74. Bramble, T., 2015. The Australian economy after the mining boom.Red Flag. Caputo, R. and Herrera, L.O., 2017. Following the leader? The relevance of the Fed funds rate for inflation targeting countries.Journal of International Money and Finance,71, pp.25- 52. Cole,D.andNightingale,S.,2016.SensitivityofAustraliantradetotheexchange rate.Reserve Bank of Australia Bulletin, pp.13-20. Data.worldbank.org.(2018).Australia|Data.[online]Availableat: https://data.worldbank.org/country/australia [Accessed 26 May 2018]. Downes, P.M., Hanslow, K. and Tulip, P., 2014. The effect of the mining boom on the Australian economy. Duarte, L.D.R.V., Kedong, Y. and Xuemei, L., 2017. The Relationship between FDI, Economic Growth and Financial Development in Cabo Verde. International Journal of Economics and Finance, 9(5), p.132. Hamilton, J.D., Harris, E.S., Hatzius, J. and West, K.D., 2016. The equilibrium real funds rate: Past, present, and future. IMF Economic Review, 64(4), pp.660-707. Hartnett, N. and Romcke, J., 2015. The predictability of management forecast error: a study of Australian IPO disclosures. Kydland, F.E., Rupert, P. and Šustek, R., 2016. Housing dynamics over the business cycle.International Economic Review,57(4), pp.1149-1177.
16ECONOMICS ASSIGNMENT Marković,M.,Zdravković,S.,Mitrović,M.,&Radojičić,A.(2016).Aniterative multivariate post hoc I-distance approach in evaluating OECD Better Life Index. Social Indicators Research, 126(1), 1-19. Mathews, T., 2017. The Effect of Chinese Macroeconomic News on Australian Financial Markets.TheSensitivityofPersonalIncometoGDPGrowth1FactorsAffectingan Individual’s Future Labour Market Status 11 Measures of Inflation Expectations in Australia 23 The Cash Market 33 The Future of Cash 43, p.53. Mirkov,N.andNatvik,G.J.,2016.Announcementsofinterestrateforecasts:Do policymakers stick to them?.Journal of Money, Credit and Banking,48(5), pp.901-920. Murray, G., 2017.Capitalist networks and social power in Australia and New Zealand. Routledge. Nevile, J.W., 2016. A Simple Econometric Model of the Australian Economy. InPost- KeynesianEssaysfromDownUnderVolumeII:EssaysonPolicyandApplied Economics(pp. 121-137). Palgrave Macmillan, London. Poon, A., 2017. Three Applications of Time-Varying Parameter and Stochastic Volatility Models to the Malaysian and Australian Economy. Rey, H., 2016. International channels of transmission of monetary policy and the mundellian trilemma. IMF Economic Review, 64(1), pp.6-35. Robinson, T., Tsiaplias, S. and Nguyen, V.H., 2015. The Australian Economy in 2014–15: An Economy in Transition.Australian Economic Review,48(1), pp.1-14. Tung, L.T. and Thanh, P.T., 2015. Threshold in the relationship between inflation and economic growth: Empirical evidence in Vietnam. Asian Social Science, 11(10), p.105. Vegh,C.A.andVuletin,G.,2015.Howistaxpolicyconductedoverthebusiness cycle?.American Economic Journal: Economic Policy,7(3), pp.327-70.
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