Australian Economy Analysis

This assignment delves into a comprehensive analysis of the Australian economy. It examines various economic indicators such as unemployment, inflation, productivity, and interest rates. The analysis explores the impact of global factors on the Australian economy, including exchange rate movements and commodity prices. Furthermore, it discusses the challenges and future prospects facing the Australian economy, considering issues like fiscal policy, income inequality, and demographic trends.

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

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Executive Summary
The economy of Australia can be considered one of the highly developed and stable
economies of the world, characterized by the presence of productive and efficient industrial
sectors, robust external relationships with other countries and an inherently stable policy
framework in the country, which contributes to the economic growth of the country over the
years. The economy has however been subjected to several fluctuations and unanticipated
phenomena, domestic as well as global, which has contributed considerably in shaping up the
economy of the country. Taking this into consideration, the paper collects and analyzes the data
on different economic indicators which has considerable effects on the growth of the economy. It
also tries to interpret the dynamics in those indicators and their inter-relationships, using the
existing economic theoretical and conceptual framework.

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Table of Contents
Introduction......................................................................................................................................3
a) Evaluation of the economy of Australia......................................................................................3
Relationship between the Real GDP and other variables............................................................3
Relationship between Real GDP growth and the rate of unemployment....................................4
Relationship between the Real GDP and the Cash rate of Australia...........................................5
Relationship between the Real GDP and the rate of inflation.....................................................6
Relationship between the Real GDP growth rate and the net exports.........................................7
Relationship between the Real GDP and the exchange rate in Australia....................................8
b) Relationship between inflation and unemployment rate.............................................................9
c) Tight Monetary Policies............................................................................................................11
d) Australian Economy: Future Forecast.......................................................................................11
Conclusion.....................................................................................................................................11
References......................................................................................................................................12

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Introduction
Over the last few decades, the economy of Australia has emerged as one of the strongest
economies in the global framework and is currently one of the largest mixed economies in the
world. Much of this can economic prosperity of the country can be attributed to the consistent
economic growth of the country, stable employment scenes and striking growth in the industrial
and commercial sectors (Plumb, Kent and Bishop, 2013). In the recent periods, the country has
developed a robust service sector, which contributes more than 60% in the GDP of the country
and makes provision of employment for more than 70% of the total labor force. Among the other
significant industries of the country, are mining and gas industry, which contribute significantly
in the economic prosperity of the country. The export sector of the country has also grown
impressively over the years (Rees, Smith and Hall, 2016).
Keeping this aspect in consideration, the concerned assignment tries to evaluate the
performance of the country’s economy between the time period of 1990-2015. To evaluate the
same, the report tries to take into account the dynamics of the real GDP, unemployment rate, and
rate of interest, net exports and the exchange rate in the country over the concerned period. The
report also tries to analyze the policy implications and tries to predict the outlook of the economy
of the country in future.
a) Evaluation of the economy of Australia
The primary indicator of economic dynamics in a country is the movements in the Gross
Domestic Product of the country, which is the sum of the value of all the goods and services that
are produced within the geographical domain of that particular country within one economic
year. The GDP, being one of the primary growth indicators of the economy of any country, is
itself dependant on several exogenous as well as endogenous factors and their dynamics in the
concerned economy. Of these factors, the ones of primary implications are the cash rate (interest
rate), unemployment, exchange rate, inflation rate and the value of the net exports of the
concerned country. This section of the assignment tries to analyze the relation of the GDP of
Australia with the above-mentioned determining factors in the economy of the country (Butlin,
2013).
For the purpose of estimating the same, the value of the Real GDP is obtained for the
time period of 1990-2015. Real GDP is an inflation-adjusted measure of the economic growth,
which is calculated by considering a fixed year or a base year of less economic turmoil. The
average growth of the Real GDP in the country is seen to be around 3.1%, with the highest
accounted growth being 5.01% (1999) and the lowest being -0.38% (1991) (McLean, 2012). The
relation of the Real GDP with the five other economic indicators is shown as follows:
Relationship between the Real GDP and other variables
The relationship of the dynamics of the Real GDP of Australia, over the concerned period
of time, with the other indicators, can be summarized as follows:

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Table 1: Relation of Real GDP with other five economic indicators
Correlation between GDP and five indicators
Real GDP
growth rate
Cash
Rate
Unemployment
rate
Inflation
rate
Exchange rate Net
exports
Real GDP
growth rate
1
Cash Rate -0.08 1
Unemployment
rate
-0.13 0.28 1
Inflation rate -0.03 0.64 -0.23 1
Exchange rate 0.20 0.04 0.26 0.08 1
Net exports 0.23 0.26 0.55 -0.02 0.85 1
(Source: Created by the author based on the data collected from World Bank:
Data.worldbank.org, 2018)
Relationship between Real GDP growth and the rate of unemployment
One of the primary economic indicators of the overall welfare of the country as well as its
residents is the rate of unemployment as much of the welfare of the residents of the country is
dependent on the scope of employment and economic prosperity of the residents. Australia, in
this context, has maintained an average unemployment rate of around 6.77% in the concerned
period, with the same reaching as high as 11% in 1994, while the same reduced to 4.4% in 2008,
the latter being the least. The level of employment is directly linked to the growth in the GDP of
the country, as the increase in the latter implies greater productivity and greater job scopes in the
economy. Thus, the relationship between the real GDP and unemployment in Australia is
expected to be negative (Gregory and Smith, 2016). The relation between the Real GDP growth
and the growth rate of unemployment in the country in the concerned period can be seen from
the following figure:

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1990 1995 2000 2005 2010 2015 2020
-2.00
0.00
2.00
4.00
6.00
8.00
10.00
12.00
Real GDP growth rate and Rate of unemployment
Real GDP growth rate Unemployment rate
Year
Rate(%)
Figure 1: Real GDP Growth and the rate of unemployment in Australia (1990-2015)
(Source: Data.worldbank.org, 2018)
From the above figure, it can be seen that the two economic variables move in reverse
direction and the correlation between the same is estimated to be -0.13, which in turn implies that
there exists a negative linkage between the Real GDP and the unemployment dynamics of the
country. From the above figure, it can be asserted that the unemployment rate of the country has
decreased considerably with the increase in the Real GDP of the country with time. In the recent
period, there has been a considerable increase in the employment generation in the country, with
the total employment rising to 12.44 million. Much of which is attributed to the increase in the
labor force participation rate, which has increased by 0.2% in the recent period (Whiteford,
2014).
Relationship between the Real GDP and the Cash rate of Australia
The cash rate, in Australia, is the rate of interest, which is charged by the Reserve Bank
of the country, on the loans to the other commercial banks of the country. On an average, the
cash rate in the country, in the given period has been around 5.63%. In general, in the presence
of a low level of cash rate, the commercial banks can borrow more from the Central Bank of the
country, which in turn increases the liquidity in the economy by increasing the availability of
loan able funds in the economy (Deans and Stewart, 2012). This in turn, is clubbed with an
increase in the overall investments in the country as investment and the rate of interest in the
country are inversely related. The GDP of the country is positively affected by the increase in the
investment, which in turn implies that there is supposed to be an inverse relationship between the
cash rate and the Real GDP dynamics of the country.

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1990 1995 2000 2005 2010 2015 2020-2.00
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
18.00
Rate of Real GDP growth and Cash rate
Real GDP growth rate Interest rate (Cash rate)
Year
Rate (%)
Figure 2: Relationship between the Cash rate and the growth rate of Real GDP (1990-2015)
(Source: Rba.gov.au, 2018)
As can be seen from the above figure, there exists an inverse relationship between the
growth rate of the Real GDP and the Cash rate of the country, which asserts the above economic
conceptual derivation. The correlation is also found to be -0.08, which indicates towards the
presence of a negative relation between the concerned variables.
As can be seen from the above figure, with time, the growth rate of the Real GDP of the
country has increased, whereas the cash rate has also decreased with time. This in turn indicates
towards the presence of an expansionary monetary policy framework in the country. This can be
related to the increase in the demand and supply side activities of the construction sector of the
country and the continuous increase in the demand for residential investment, which in turn is
boosted by the expansionary monetary policy. This justifies the low rate of cash rate prevailing
in the economy. The cash rate was as low as 2.13% in 2015, which was deliberately done by the
RBA in order to cater to the economic growth in the country (Shamsuddin and Xiang, 2012).
Relationship between the Real GDP and the rate of inflation
The rate of inflation in a country depicts the overall price level in the country at a point of
time and has significant implications on the overall economic growth and welfare of the country.
In general, a very high or a very low inflation are both detrimental to the growth and welfare of
the economy of a country. A moderate inflation level, of demand-pull nature, helps in increasing
the production of the country as a whole. However, if there is cost-push inflation, due to the
increase in the overall cost of production, then it affects the economy adversely (Lutz, 2014).
Australia, has over the years, maintained a consistently stable price level with the average
inflation rate being 2.7%. However, the decade of 1990-2000 has seen substantial amount of
fluctuations in the same, with the highest being 7.27% (1990) and the lowest being 0.25%
(1997). In general, the Real GDP of a country is expected to be positively related with the rate of
inflation in a country as with an increase in the productivity and economic prosperity, the
aggregate demand in the country increases, thereby exerting an upward pressure on the price
levels.

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Figure 3: Relationship between the Real GDP growth rate and the rate of Inflation
(Source: Data.worldbank.org, 2018)
However, as can be seen from the above figure, there exists a negative and highly
fluctuation relationship between the two economic indicators in Australia for the concerned
period. The correlation between the same is also found to be -0.03, which contradicts the
theoretical conventions. In general high inflation is expected to be accompanies by a high GDP
growth rate. However, here inflation adjusted growth rate is seen to be having a roughly inverse
trend, much of which can be attributed to the presence of the debt crisis in Australia as the
presence of a high debt along with a high rate of inflation affects the GDP growth of the country
adversely. The trends are found to be similar in this case (Kumar, Webber and Perry, 2012).
Relationship between the Real GDP growth rate and the net exports
The net exports in a country are the estimate of the balance of trade, which is obtained by
deducting the import spending from the earnings from the exports. Thus, the presence of a
positive net export balance implies that the value of exports of the country is bigger than the
value of imports, which in turn indicates towards a positive economic growth trend in the
country. In this context, over the years, Australia has significantly improved its global trade
scenario by setting up productive trade relations with almost all the major economies in the
country. The trade balance of the country has been mostly positive with an average balance being
nearly 20 billion AUD. There should be a positive relation between the growth rate of the Real
GDP and the net exports in the country.
1985 1990 1995 2000 2005 2010 2015 2020
-1.00
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
Real GDP growth rate and rate of inflation
Real GDP growth rate Inflation rate
Year
Rate (%)

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1990 1995 2000 2005 2010 2015 2020
-200
0
200
400
600
800
1000
1200
1400
Real GDP Growth Rate and Net Exports
Net export Real GDP
Year
AUD/billion
Figure 4: Real GDP growth rate and Net Exports in Australia
(Source: Data.worldbank.org, 2018)
As can be seen from the above figure, there has been a positive trade balance in the
country over the years, barring the last few years, which is accompanied by the increase in the
growth rate of the Real GDP. The correlation is also estimated to be 0.23. However, in the last
few years, the country has been experiencing a deficit in its trade balance, which can be
attributed to an increase in the imports of intermediate and consumption goods and also an
increase in the services which are imported by the country in the last few years (Makin and
Narayan, 2013). This increase in imports has surpassed the volume of increase in the export of
the metals, mineral ores and fuels, thereby increasing the trade deficit in the country.
Relationship between the Real GDP and the exchange rate in Australia
The exchange rate prevailing in a country is the value of the domestic currency measured
in terms of the currency value of the country with which it is compared, the country
conventionally taken being the USA. When the exchange rate increases, it indicates towards the
devaluation of the domestic currency, which in turn makes exports cheaper. The cheaper exports,
by their increased demand contribute positively on the GDP of the country, thereby indicating
towards a positive relation between the two parameters theoretically.
This is however, supported by the empirical evidences in Australia, as the correlation
between the two concerned variables is found to be 0.20.

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1985 1990 1995 2000 2005 2010 2015 2020
-1.00
0.00
1.00
2.00
3.00
4.00
5.00
6.00
GDP growth rate and exchange rate
Real GDP growth rate Exchange rate (AUD/US)
Year
Figure 5: Relationship between the Real GDP growth rate and exchange rate in Australia
(Source: Rba.gov.au, 2018)
As is evident from the above figure, the exchange rate of the country has been more or
less stabilized between 1 and 2 USD, with the level being moderate. This has however, been
accompanied by a growth rate in the real GDP of the country, though the latter has been
subjected to considerable fluctuations over the concerned period of time (Manalo, Perera and
Rees, 2015).
b) Relationship between inflation and unemployment rate
In general, there exists a negative relationship between the rate of inflation and the
unemployment rate in a country, which can be explained with the help of the economic theory of
Phillips Curve, named after A. W. Phillips. As per the assertions of this theory, with the increase
in the economic growth of a country, the employment scopes in the economy increases, thereby
decreasing the unemployment in the economy (Forder, 2014). However, with the increase in
GDP and aggregate demand, the price level in the country increases, which in turn increases the
inflation rate.

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Figure 6: Phillips Curve
(Source: Forder, 2014)
For Australia, the correlation between inflation and unemployment is seen to be -0.23,
which confirms the assertions of the Phillips curve.
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
0.00
2.00
4.00
6.00
8.00
10.00
12.00
Unemployment rate
Inflation rate
Figure 7: Inflation and unemployment in Australia
(Source: Data.worldbank.org, 2018)
The dynamics in the above two indicators show a prominent inverse relationship, barring
several exceptions, one of which mainly occurred post 1990, specifically in 1994-1995 and in

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2002-2004, when the fall in inflation is also seen to be accompanies by a fall in inflation also.
This may be attributed to the post recession policy framework adopted by the RBA, with the
twin objectives of reducing both the inflation to a moderate level and the unemployment to an
acceptable range. The RBA has done the same by targeting inflation first and then by adjusting
the market rates of interest.
c) Tight Monetary Policies
The monetary authorities of a country in the presence of a high inflation rate take
contractionary or tight monetary policies. In Australia, this has been done by the RBA during the
late 1980s, when the inflationary pressure was extraordinarily high due to the presence of high
cash rate (15%). The tight monetary policy however, landed the economy in recessionary shocks,
which again forced the RBA to ease their monetary policy, by following a quantitative easing
policy by reducing the interest rates in the country. However, again in 2004, the monetary
authority again resorted to tight monetary policy in order to combat the excessive aggregate
demand and inflationary pressure in the country (Carpenter and Demiralp, 2012). The presence
of high household debt was also one of the reasons behind the implementation of such policies.
d) Australian Economy: Future Forecast
Based on the past and the present traits in the economic growth of the country, the future
growth rate of the country is predicted to be between 2.5% and 3.5% in the recent years. The rate
of interest is expected to be kept at a low level deliberately to contribute to the economic growth
of the country. However, the wage and the savings rate are both predicted to remain at a
moderate level, which might actually help in keeping the inflation at a low level. Investment,
however, is expected to gain impetus, attributing to the growth of the housing and construction
sector. The expected risk of recession is also low for the country, due to the withering out of the
effects of the housing bubble burst (Oecd.org, 2018).
Conclusion
From the above discussion which analyzes the macroeconomic performance of the
country between 1990-2015, it can be asserted that the performance of the economic indicators
of Australia has been moderately stable, barring several non-dramatic negative fluctuations,
which can be explained by the occurrence of different economic phenomena in the country as
well as globally. The behaviors of the indicators, barring several exceptions, are seen to mostly
abide by the economic theories and modules and the stability of the economy can be mostly
attributed to the inherently robust policy framework of the country.

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References
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University Press.
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