EFN405 Applied Economics: Analyzing Economic Growth in Australia

This assignment provides an analysis of Australia's macroeconomic performance between 2011 and 2017, focusing on economic growth, cyclical movements, and the impact of fiscal and monetary policies. It examines the structural shift in the Australian economy from manufacturing and agriculture to the service and mining sectors, highlighting the influence of global events like the financial crisis and increasing demand from China. The analysis also covers the housing market bubble, the effects of tax policies, and the role of the Reserve Bank of Australia (RBA) in managing inflation and unemployment. The assignment concludes that while government policies have contributed to overall economic growth, the housing sector has experienced excessive demand and price increases, leading to a housing bubble.

Running head: MACROECONOMICS
Macroeconomics
Name of the Student:
Name of the University:
Author note:

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Answer 1
Australia has been experiencing the longest running economic growth for almost 26
years, which has set a record (Hatfield-Dodds et al., 2015). This trend is present during the
period between 2011 and 2017 too. The graph below shows the quarterly original GDP data of
Australia and the trend in GDP over the years 2011-2017.
Mar-2011
Jul-2011
Nov-2011
Mar-2012
Jul-2012
Nov-2012
Mar-2013
Jul-2013
Nov-2013
Mar-2014
Jul-2014
Nov-2014
Mar-2015
Jul-2015
Nov-2015
Mar-2016
Jul-2016
Nov-2016
Mar-2017
Jul-2017
Nov-2017
0
50000
100000
150000
200000
250000
300000
350000
400000
450000
500000
GDP of Australia, Trend and Original, 2011 - 2017
($ Million)
GROSS
DOMESTIC
PRODUCT ;
$ Millions
Trend
GROSS
DOMESTIC
PRODUCT ;
$ Millions
Original
GDP
Figure 1: GDP of Australia, Trend and Original, 2011 - 2017 ($ Million)
(Source: Abs.gov.au, 2018)
From the above graph, it is seen that the Australia has experienced economic growth
during the years 2011 to 2017. The original as well as the trend line are upward rising. Cyclical
movements in an economy refer to the periods of expansion and contraction. During expansion,
aggregate demand in the economy increases and the GDP increases too (Gabisch & Lorenz,
2013). The opposite happens during the period of contraction. Every economy goes through the

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cyclical movements. The cyclical movement in the Australia’s economy comes from the
structural shift over the years. The economy of Australia has gradually shifted from
manufacturing and agriculture towards the service sector, with emphasis on the mining industry
(Voigt et al., 2014). However, after the global financial crisis in 2008-09, the economy has
experienced a fall in the mining sector growth and increasing growth in the service sector. The
unemployment and inflation remained stable, with inflation being lower than 2% (Svensson,
2015). The changes in inflation are attributed to the changes in the resource prices, which is
minimal. The wage rise was lower too, leading to a fall in demand for the consumer goods and
fall in consumer expenditure. This led to a fall in aggregate demand in the economy, and
consequently a contraction in GDP and economic growth in the first quarter of every year from
2011 to 2017 (As seen in the graph). On the other hand, demand from China has grown
significantly during this period and export sector has grown, which resulted in increase in the
GDP (Plumb, Kent & Bishop, 2013). Thus, the fall in domestic demand has been somewhat
offset by the demand for exports from China and other countries. This resulted in a rise in the
production and hence, expansion and positive economic growth.
On the other hand, private investment on the housing sector has increased quite rapidly
and the sky-high demand for housing has pushed the housing prices quite high. However, the
nation is burdened with private debt from mortgages; 186% of the disposable income as the
interest payments are 8.7% of the disposable income (Yates, 2014) and falling prices, which
affects the aggregate demand, resulting in contraction in some quarters. During this period, the
nominal GDP grew at a slower pace than the real GDP. Real GDP incorporates the price change
in the economy (Mankiw, 2014). Hence, the economy feels weaker than what the production
number imply. This is reflected in a low employment growth, lower wage growth and lower

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consumer spending on retail. It is found that after the global financial crisis, as the mining
contribution in real output stared to fall, there is decline in real income growth (Ong, 2017).
Answer 2
Fiscal policy refers to the policy that allows the government to adjust its expenditure and
tax rates to influence the economy of a nation (Mankiw, 2014). The government uses the fiscal
policies to support the aggregate demand through increase in public spending and/or by cutting
taxes. The Australian economy has been experiencing a housing bubble since the past decade.
The continuous increase in housing demand has led to a significant increase in the housing
prices, and consequently a rise in private debts. However, the housing market is favorably taxed.
The fiscal policies include four types of taxes to handle this crisis situation. Negative gearing,
capital gain tax, stamp duties and land taxes are used in the real estates.
Firstly, negative gearing tax on the rent allows the investors to earn cash against renting
out the property owned, allowing them to invest more on properties. Secondly, capital gains tax
is not paid on the primary residence and for the individuals’ investment properties; only half of
the capital gain is taxed. These two taxes make the real estate attractive for investment. Thirdly,
stamp duties, which are considered to be inefficient by the economists, are meant to discourage
people from investing in the real estate, and lastly, two types of land taxes, state and territory, are
levied on the real estate investment properties but not on owner-occupied housing (Smith, 2015).
The net effect of these tax policies coupled with generous tax subsidies have led people
to invest more on the real estate. The government provides assistance to the home owners and
buyers as first-home owners grants, family home's exemption from capital gains tax, stamp duty
concessions, and land tax, along with the pension and other assets tests (Middleton, 2013). These

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help in wealth accumulation of the families and individuals, which has pushed the demand
higher for the real estate. However, as the supply is limited, the higher demand has led to a big
rise in the prices.
On the other hand, monetary policy is used by the government to control and influence
the money supply in the economy. These decisions are implemented by changing the cash rate
and the demand and supply forces of overnight funds in the market determine the cash rate
(Mankiw, 2015). The government influences the interest rates by changing the cash rate. The
interest rates in turn influences the savings and investment, expenditure, supply of credit, asset
prices, exchange rate and demand in the economy. Depending on the demand level and inflation
in the economy, the government applies expansionary or contractionary monetary policies.
A lower interest rate allows people to spend more on the housing, leading to more
construction jobs and higher employment. The rise in disposable incomes of people leads to
higher demand and hence, higher price of housing, as supply is limited. Along with that, the
pressure of growing population has been pushing the prices up for housing. RBA has decreased
the cash rate from 4.75% in 2011 to 1.50% in 2017 (Rba.gov.au, 2018). This has lowered the
interest rate in the country and people were discouraged to save and encouraged to spend more.
This has been reflected in rise in spending in other sectors. The aggregate demand increased in
the economy leading to higher GDP (Costello, Fraser & MacDonald, 2015). Since, the
government has been giving concessions on the real estate investments through expansionary
fiscal policies, people were interested to invest more on the housing. This has resulted in
increased demand as well as increased price in the housing market.

AS
AD1
AD2
P1
P2
E1
E2
Q1 Q2
Price of housing
Supply of housing
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Figure 2: Aggregate demand and supply in the housing market
(Source: Author)
Economic growth depends on many factors and housing market alone cannot influence
much of the growth. The Australian government increased the money supply in the economy by
lowering the cash rate and expansionary fiscal policies. The spending in the economy has
increased, leading to economic growth. However, the housing market also experienced excess
demand. The demand for housing has been increasing at a higher rate than the supply, leading to
increase in price. Moreover, there is less than expected inflation of 1.9% and stable
unemployment of 5.6% in the economy, coupled with lower wage growth (Wadud, Bashar &
Ahmed, 2012). Hence, other sectors in the economy have experienced growth due to the policies,
while housing sector has been experiencing a bubble.

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References
Abs.gov.au. (2018). 5206.0 - Australian National Accounts: National Income, Expenditure and
Product, Dec 2017. Retrieved from:
http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/5206.0Dec%202017?
OpenDocument
Costello, G., Fraser, P. & MacDonald, G. (2015). "Monetary policy influences in Australian
housing markets", International Journal of Housing Markets and Analysis, Vol. 8 Issue:
2, pp.265-286, DOI: https://doi.org/10.1108/IJHMA-08-2014-0032
Gabisch, G., & Lorenz, H. W. (2013). Business cycle theory: a survey of methods and concepts.
Springer Science & Business Media.
Hatfield-Dodds, S., Schandl, H., Adams, P. D., Baynes, T. M., Brinsmead, T. S., Bryan, B. A., ...
& McCallum, R. (2015). Australia is ‘free to choose’economic growth and falling
environmental pressures. Nature, 527(7576), 49. DOI: 10.1038/nature16065
Mankiw, N. G. (2014). Principles of macroeconomics. Cengage Learning.
Middleton, R. (2013). Towards the managed economy: Keynes, the Treasury and the fiscal
policy debate of the 1930s. Routledge.
Ong, R. (2017). Governments trapped in a vicious cycle of housing policies and prices. ABC
News. Retrieved from http://www.abc.net.au/news/2017-04-04/governments-trapped-in-
vicious-cycle-of-housing-policies-prices/8414008
Plumb, M., Kent, C., & Bishop, J. (2013). Implications for the Australian economy of strong
growth in Asia. Reserve Bank of Australia.

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Rba.gov.au. (2018). Cash Rate. Reserve Bank of Australia. Retrieved from:
https://www.rba.gov.au/statistics/cash-rate/
Smith, W. (2015). Four tax policies Australian house prices rest on. The Conversation. Retrieved
from: https://theconversation.com/four-tax-policies-australian-house-prices-rest-on-
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Svensson, L. E. (2015). The possible unemployment cost of average inflation below a credible
target. American Economic Journal: Macroeconomics, 7(1), 258-96. DOI:
10.1257/mac.20130176
Voigt, S., De Cian, E., Schymura, M., & Verdolini, E. (2014). Energy intensity developments in
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Economics, 41, 47-62. DOI: https://doi.org/10.1016/j.eneco.2013.10.015
Wadud, I. M., Bashar, O. H., & Ahmed, H. J. A. (2012). Monetary policy and the housing
market in Australia. Journal of Policy Modeling, 34(6), 849-863. DOI:
https://doi.org/10.1016/j.jpolmod.2012.06.002
Yates, J. (2014). Protecting housing and mortgage markets in times of crisis: a view from
Australia. Journal of Housing and the Built Environment, 29(2), 361-382. DOI:
https://doi.org/10.1007/s10901-013-9385-y