Macroeconomic Analysis of Australia: Real GDP Growth, Inflation, Unemployment, Net Export and Real Exchange Rate

This report analyses the macroeconomic indicators of Australia including real GDP growth rate, inflation rate, unemployment rate, net export and real exchange rate. It establishes the relationship between these indicators and provides a macroeconomic outlook of Australia.

Running head: ECONOMICS ASSIGNMENT
Economics Assignment
Name of the student
Name of the university
Author Note

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Executive Summary:
This report has intended to analyse some chief macroeconomical factors like real GDP
growth rate, inflation rate and unemployment rate to understand the condition of existing
business cycle of Australia. Moreover, this report has described about the relation between
real exchange rate and net export of Australia. Moreover, a relation between the Fed Fund of
U.S.A and the cash rate of Australia has also described. With the help of those
macroeconomical indicators, this report has intended to describe macroeconomic outlook of
Australia.

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Table of Contents
Introduction:...............................................................................................................................3
Relation between real GDP growth of Australia with its inflation and unemployment rate:....3
Analysis between Real GDP growth and inflation rate:........................................................4
Analysis between Real GDP growth and unemployment rate:..............................................5
Relation between net export and real exchange rate of Australia with USA:............................7
Relation between Australia’s cash rate and Federal Reserve’s fund rate:.................................9
Conclusion:..............................................................................................................................10
References:...............................................................................................................................11

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Introduction:
Australia is one of the wealthy nations, possesses healthy economic condition and
consequently becomes the 14th largest economy in this world. The exporting sector and
service sector have played vital role for contributing significant portion to the country’s
national income or gross domestic product (GDP). Moreover, the country has successfully
reduced its poverty level (Luke 2018). With strong agricultural sector and mining sector, the
country has obtained an important position in world economy. However, the economic
condition of this country has experienced various obstacles for last few years. On the
contrary, the United States of America has remained the largest economy across the world.
As a result, the U.S dollar has considered as primary reserve currency (Frank 2018).
Moreover, U.S.A has remained on the chief trading partner of Australia. Hence, this report
has intended to focus on some macroeconomical indicators, like real GDP growth rate,
unemployment and inflation rate of Australia. Moreover, the report has also intended to
establish a relationship between net export and real exchange rate of Australia with the
U.S.A. In addition to this, the specified report is going to analyse that whether the Federal
Reserve Fund’s rates of the U.S.A has influenced Australia or not.
Relation between real GDP growth of Australia with its inflation and unemployment
rate:
Real Gross Domestic Product ( GDP) of Australia measures the value of economic
output of this country for a particular time based on a price level of particular year and
consequently this measurement provides an inflation or deflation adjusted real national
income of Australia (Jha 2018). This can influence the country’s inflation rate and
unemployment rate accordingly. On the other side, inflation rate is another macroeconomical
concept that represents the rate of increasing general price level of goods and services of
Australia. This inflation rate has a negative relationship with purchasing power parity of an

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economy (Bermingham, Coates and O'Brien 2016). For instance, higher inflation rate implies
lower purchasing power of citizens while the for lower inflation rate, the opposite situation
occurs. On the other side, unemployment rate of Australia represents the share of its entire
workforce, who remains unable to find jobs. According to the law of Okun, economic growth
of a country has a negative relationship with its unemployment rate. This implies that if a
country has 2% potential GDP growth rate then to reduce unemployment rate by 1%, the
country needs to grow its GDP by 4% (Bournakis and Christopoulos 2017). Hence, with the
help of statistical data and diagrams, the report can analyse relationship of real GDP growth
rate of Australia with its inflation rate and also can establish a relationship between this real
GDP growth rate with its unemployment rate.
Analysis between Real GDP growth and inflation rate:
1990 1993 1996 1999 2002 2005 2008 2011 2014
-1
0
1
2
3
4
5
6
7
8
Real GDP growth rate (%)
Inflation rate of Australia (%)
Year
Real GDP growth and inflation rate
(%)
Figure 1: Relation between Real GDP growth and inflation rate
The average growth rate of Australia’s real GDP from 1990 to 2016 is almost 3.08%.
Initially, this growth rate has remained almost 3.53% while inflation rate of this country has
remained almost 7.27%. In 1990s, the country has experienced a recession period and
consequently the growth rate has decreased by 0.38%. Consequently, during this period, the
inflation rate has also decreased and become 3.22%. However, after 1992, Australia has
started to recover its economic condition with 0.44% growth rate. After moving at a moderate

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rate, this growth rate has reached at peak level with 5.01% in 1999 (McKibbin and Panton
2018). On the other side, inflation rate has fluctuated over time though it has remained at
comparatively lower level. However, in 2000 and 2001, this inflation rate has exceeded
Australia’s real GDP growth rate. As real GDP gives an inflation-adjusted measure of
national income, it has a negative relationship with the country’s inflation rate. For instance,
in 2001, Australia’s inflation rate has become 4.38% while real GDP growth rate has become
1.93% (Stevens [1] Governor, G. 2018). However, in 2009, both real GDP and inflation rate
of Australia have reached at a minimum point. Hence, from this phenomenon it can be said
that some macroeconomical factors except inflation rate has influenced Australia’s real GDP
growth rate to decrease further. After this year, the real GDP growth rate of this specified
country has increased further but cannot reach a higher rate.
Analysis between Real GDP growth and unemployment rate:
1990 1993 1996 1999 2002 2005 2008 2011 2014
-2
0
2
4
6
8
10
12
Real GDP growth rate (%)
Unemployment, total (% of total
labor force) (national estimate)
Year
Real GDp grow th rate and
une m ploym e nt rate (%)
Figure 2: Relation between Real GDP growth and unemployment rate
In Australia, the average unemployment rate has remained at 6.73% between 1990
and 2016. In 1990s, the real GDP growth rate of Australia has remained at a lower level
while unemployment rate has remained at a higher position. However, after few years, the
country has started to recover its economic growth rate and consequently the unemployment
rate of this specified country has started to decline. In 2008, these two rates have become

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almost similar though after this year, again real GDP growth rate of this country has started to
decrease while unemployment rate has increased again. The above figure has sharply showed
that Australia’s economy has followed Okun’s law. This inverse relation between real GDP
growth rate and unemployment rate can be discussed with help of economic concept. Within
an economy, higher GDP growth rate helps the country to generate more employment
opportunity and this in turn forces the unemployment rate of this country to decrease further.
The opposite phenomenon occurs when the country experiences decrease in real GDP. This
phenomenon has also occurred in Australia.
After analysing these two relationships, the report can state that whether the country
has experienced any business cycle or not. This business cycle provides a clear understanding
for a country’s economic growth (Bertay, Demirgüç-Kunt and Huizinga 2015). It is very
difficult for a country to construct a smooth trend of economic growth over time. Due to
fluctuation of various economical factors, this cycle fluctuates and consequently gets four
phases, viz., expansion, peak, recession and trough. According to above two diagrams,
Australian economy has experienced recessionary period during 1990-1991, 2000-2001 and
2008-2009 (Abs.gov.au. 2018). Hence, during these phases, the economy has experienced
slower rate of economic growth, higher rate of inflation along with higher rate of
unemployment. However, after 1991, Australia has experienced expansionary period of its
business cycle and consequently in 1999 it has achieved highest economic growth. However,
after this year, another business cycle has started and the economy has again fallen in a
recessionary period while the world economy has experienced financial crisis in 2008
(Persakis and Iatridis 2016). At present, due to decrease in mining investment, and lower
household spending along with lower wage growth has forced the country’s economy to
experience slowdown in economic growth.

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Relation between net export and real exchange rate of Australia with USA:
Net export of Australia shows the difference between its total export and total
imports. Moreover, real exchange rate represents the ratio between price levels of a foreign
country with domestic one (Arezki and Brueckner 2014). For calculating this ratio, the
foreign currency is converted into the domestic one. Net export and real exchange rate has an
important relationship. Net export of a country decreases with other one when real exchange
rate between these two countries remains high (Juselius, Reshid and Tarp 2017). On the
contrary, during lower rate of real exchange rate, net export of domestic country increases.
This happens because higher real exchange rate implies relatively higher prices for products
of domestic country compare to the prices of foreign country’s products. Hence, during
higher exchange rate, it becomes difficult for domestic country to export with higher prices
while imports with comparatively lower prices become easy. On the other side, lower
exchange rate implies lower prices for domestic products and this in turn helps the domestic
country to export more products with comparatively lower prices while imports becomes
costlier for this concerned country.
This report has showed the relationship between net export and real exchange rate of
Australia with the U.S.A. In this context, it is important to mention that USA has remained
one of the largest trading partners of Australia as both countries trades with each other by
large exchange. Hence, by subtracting total export of Australia from its total imports, net
export has been measured and this can influence greatly if the real exchange rate between
Australia and the U.S.A varies.

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1985 1990 1995 2000 2005 2010 2015 2020
0
0.5
1
1.5
2
2.5
net export
Real exchange rate (
Figure 3: Real exchange rate and net export between Australia and the U.S.A
According to the data of the World Bank, AUD/US real exchange has remained 1.28
in 1990 and this represents that to get 1 unit of USD, Australia needs to pay 1.28 AUD.
Hence, at this situation, imports of Australia have become costly as it has required to pay
more amount of AUD for purchasing a product from the U.S.A. On the contrary, during this
year, exports have become cheaper for Australia and consequently the net export of this
country has increased. The value of real exchange rate between Australia and U.S.A has
increased further and has remained above 1.36 on an average between 1992 and 1997 (Cole
and Nightingale 2016). Moreover, in 1998 this rate has become 1.59 and has increased
further (Data.worldbank.org. 2018). This trend has helped Australia to increase its net export
as the value of AUD has depreciated over time. Moreover, in 2000, real exchange rate has
become 1.72 and in this year, the net export of Australia has reached at its higher level.
Hence, the above-mentioned relation between real exchange rate and net exports can be seen
in Australia. Moreover, up to 2008, trade balance of Australia has remained positive.
However, after 2008, global financial crisis has affected this net export of this country. After
this crisis, the value of real exchange rate between these two countries has decreased and as a
result, net exports between these two countries have also decreased. This in turn has led the
Australia to experience trade deficit. However, after 2012, real exchange rate has again

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started to increase and consequently Australia’s net export has become positive after 2014
(Reserve Bank of Australia. 2018). This again has helped Australia to achieve positive trade
balance.
Relation between Australia’s cash rate and Federal Reserve’s fund rate:
Cash of Australia represents the bank rate of this country. The Reserve Bank of
Australia (RBA) charges this official interest rate from commercial banks to get overnight
loans. This cash rate helps RBA to adjust interest rate of this country. In this context, it can
be mentioned that financial institutions cannot change this rate by doing any transaction
(Makin, Robson and Ratnasiri 2017). The Federal Reserve’s fund rate of the U.S.A represents
the interest rate. At this rate, banks and other credit unions transfer their reserve balances to
other financial institutions for depositing overnight money (Chen, Filardo He and Zhu 2016).
Moreover, the Federal Fund’s rates play a significant role for taking any financial decision of
the U.S.A within its financial market.
1990 1995 2000 2005 2010 2015
0
2
4
6
8
10
12
14
Cash Rate (Australia)
Federal Cash Rate
Year
Figure 4: Cash rate of Australia and Federal fund rate of the U.S.A
The Fed rate has remained 7.31% in 1990 while Australia’s cash rate has remained
13%. However, the Fed has decreased its interest rate after this year and consequently the
RBA has also decreased its cash rate. However, in 1995, cash rate decreased significantly
though after that the central bank has recovered its interest rate. On the other side, the Federal

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Fund rate of the U.S.A has fluctuated significantly between 2000 and 2008. During this
period, the Fed has increased and decreased its interest rate between 7.5% and 0.5%.
Moreover, due to financial crisis, the Fed has decided to keep its interest rate at 0.5% (Liu,
Margaritis and Qiao 2016). According to above diagram, the Fed has influenced the cash rate
of Australia to some extent. This is because the U.S.A has a strong market position in world
economy for which, economic outcome of the U.S.A can influence directly or indirectly other
countries across the world.
After discussion some important macroeconomical factors, economic outlook of
Australia can be measured. It is considered that Australia is going to experience a healthy
economy in future and this in turn can help the country to experience expansionary period to
the country’s business cycle.
Conclusion:
According to above discussion, inflation rate has negatively influenced real GDP
growth rate of Australia. Moreover, real GDP growth rate and unemployment rate has sown
an negative relation and has supported Okun’s law. On the other side real exchange rate and
net export between Australia and the U.S.A has faced a negative relation and cash rate has
followed the Fed rate.

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References:
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http://www.abs.gov.au/ausstats/abs@.nsf/featurearticlesbytitle/09CA2BE34A12A670CA257
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institutions in low-income countries: evidence from an international food net-export price
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[online] Available at: https://data.worldbank.org/indicator/PA.NUS.FCRF?locations=AU
[Accessed 22 May 2018].

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Frank, A.G., 2018. The development of underdevelopment. In Promise of development (pp.
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