Macroeconomic Analysis of Australia (1990-2016) Economics Assignment

This economics assignment provides a critical evaluation of Australia's macroeconomic performance from 1990 to 2016, analyzing key indicators such as output (GDP), price levels (inflation), the labor market (unemployment), trade balance, exchange rates, and interest rates. The analysis includes modeling relationships between these variables, such as the convergence of GDP growth and unemployment trends, and the impact of exchange rates on trade. The report also examines the business cycle, the relationship between the Fed fund rate and the RBA cash rate, and provides an outlook for the Australian economy, highlighting the role of remedial measures and economic diversification. The study uses statistical data to support its claims and provides a detailed overview of Australia's economic landscape over the specified period, including the impacts of trade with the USA.

Running Head: ECONOMICS ASSIGNMENT
Economics Assignment
Name of the Student
Name of the University
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Executive Summary
The paper critically evaluates macroeconomic performance of Australia over the period of 1990-
2016. Performances are analyzed in dimensions like output, price level, labor market, trade
balance, exchange rate and interest. In modeling economic performance focus has also given on
finding relations among the variable concerned. The comparison of GDP growth and
unemployment shows a convergence in trend movement between GDP growth and
unemployment. The relative movement of inflation and GDP though does not indicate any clear
association the economy has successfully attained a stable growth rate along with a price
stability. A surplus or deficit in trade account depends on the magnitude of exchange rate. Rise in
exchange rate or depreciation lowers trade balance and appreciation decreases trade balance. A
monetary expansion has observed on part of both Australian and USA governments reflected
from steady fall in bank rates in both nations. Australia is expected to overcome the ongoing
period of slow economic growth depending on remedial measures and diversification of
economic activity.

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Table of Contents
Introduction......................................................................................................................................3
Gross Domestic Product, inflation and unemployment...................................................................3
Relation between unemployment rate and GDP growth rate......................................................4
Growth and inflation relation.......................................................................................................5
Business Cycle.................................................................................................................................6
Net export and AUD/USA exchange rate........................................................................................6
Fed fund rate and RBA cash rate.....................................................................................................8
Outlook for Australia economy.....................................................................................................10
Conclusion.....................................................................................................................................10
References......................................................................................................................................11

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Introduction
Australia is a small diversified economy having a structure of mixed market economy.
Agriculture, industry and services are the three main sectors of the economy. The economy
though mostly relies on its industrial and service sector but agriculture also has an important
place in the economy. The economy well-recognized the importance of mining industry. Mining
is considered as the main engine of economic growth. In the last few years however mining
investment has declined with a shift in growth focus to the service sector. In the GDP
composition, the highest contributor is service followed by industry and agriculture (Manalo,
Perera and Rees, 2015). An expansion of the economy marked by expansion of and output leads
to an increase in employment and price level. Trade is an important part of the economy. Trade
shares are affected by exchange rate between Australia and its trading partners especially United
State. The direction of monetary policy is determined from the position of cash rate.
Gross Domestic Product, inflation and unemployment
One vital aspect of macroeconomic performance of a nation is gross domestic product of
nation. It offers a quantitative measures of total produced output of a world. In the estimation of
GDP, market prices are used to quantity the marketed goods and services. GDP obtained using
market price of current year is called GDP at current price or nominal GDP. Another measure of
GDP is the use of base year market price teemed as GDP at constant price real GDP (Frank,
2018). In order to measure how fast tan economy is growing standard approach is to use market
percentage change in real GDP from one year to another. Economic growth in terms of its
influence on employment generation and income affects unemployment rate and inflation rate
(Fontana and Setterfield, 2016). The table below shows the summary statics of real GDP growth,
unemployment and inflation for Australia over the dynamic range of 1990 to 2015/16.
Table 1: Summary Statistics of real GDP growth, inflation and unemployment
Summary Statistics
Real GDP growth rate Inflation Unemployment
Mean 3.10 Mean 2.68 Mean 6.73
Standard Error 0.23 Standard Error 0.28 Standard Error 0.36
Median 3.53 Median 2.49 Median 6.10
Mode #N/A Mode #N/A Mode 6.90
Standard Deviation 1.21 Standard Deviation 1.46 Standard Deviation 1.89
Sample Variance 1.46 Sample Variance 2.14 Sample Variance 3.58
Kurtosis 1.74 Kurtosis 2.47 Kurtosis -0.18
Skewness -1.21 Skewness 1.15 Skewness 0.88
Range 5.38 Range 7.02 Range 6.70
Minimum -0.38 Minimum 0.25 Minimum 4.20
Maximum 5.01 Maximum 7.27 Maximum 10.90
Sum
83.6
2 Sum
72.3
3 Sum
181.6
0
Count 27 Count 27 Count 27

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Summary statistics portraits an overview of the movement of targeted variables in the chosen
time range. The Australian economy grew at an average real GDP growth rate of 3.10 percent.
The average growth rate is moderate when compared to contemporary developed nations in the
world. The average inflation of 2.68 is also at a moderate level. The average unemployment rate
in Australia however quite high with the average being 6.73 percent. Worst performance of the
economy was recorded in 1991 (Robinson, Tsiaplias and Nguyen, 2015). The negative growth
rate of -0.38 in 1991, was associated with a high unemployment rate 9.60 percent and inflation
rate of 3.22. The fastest growth was experienced during 1999. The high growth rate of 5.01
percent was associated with a low inflation of 1.47 and a comparatively low unemployment of
6.90. The decade of 1990s experienced a wide variation in terms of all the indicators like GDP
growth, inflation and unemployment.
Relation between unemployment rate and GDP growth rate
In order to analyze the relation between real GDP growth rate and that of unemployment
rate correlation is computed between the two variables. Correlation offers a measure for degree
of association between variable.
Table 2: Correlation matrix of GDP growth and unemployment
Real GDP growth
rate
Unemployment
Real GDP growth rate 1
Unemployment -0.125528172 1
The obtained correlation is between growth rate and unemployment is negative. This indicates a
high economic growth is associated with a slower growth of unemployment and vice versa. This
is rational as higher output means higher production which in turn implies a higher demand for
labor and therefore a low rate of unemployment (Hartwell, 2017).
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
-2.00
0.00
2.00
4.00
6.00
8.00
10.00
12.00
Real GDP growth and unemployment
Real GDP growth rate Unemployment
Year
Unemployment and GDP growth rate
Figure 1: Relation between real GDP growth and unemployment

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As seen from the graph at the beginning of 1990s, a wide gap exists between growth of GDP and
that of unemployment rate. In 1990, economic growth rate was 3.53 percent. The corresponding
unemployment rate was 6.90%. In the phase of recession during 1991, economic growth fell to -
0.38%. The economic contraction lead to an increase in unemployment rate to 9.60% (Gregory
and Smith, 2016). The phase of slow growth continued for the next few years with prevalence of
a high unemployment rate 9-10 percent. The peak growth rate of 5.01 percent in 1991 resulted in
a decline in unemployment rate to 6.90 percent. In the twentieth century the economy gradually
entered to a stable growth path and diversification of economic activity creates employment
opportunities in various area contributing to a lower unemployment (Meredith, 2015.) This helps
to fill the gap between unemployment and GDP growth.
Growth and inflation relation
Table 2: Correlation matrix of GDP growth and inflation
Real GDP growth
rate
Inflation
Real GDP growth rate 1
Inflation -0.019661645 1
GDP growth is negatively correlated with inflation rate. The higher GDP growth thus means a
lower inflation rate and vice versa (Harvey, 2018.) The relation however is not very effective
with value of correlation estimate being very small.
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
-1.00
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
Real GDP growth and inflation
Real GDP growth rate Inflation
Figure 2: Real GDP growth and inflation relation
No steady pattern of relation can be obtained from inflation and GDP growth. High GDP growth
indicates a higher average income. Higher income increase purchasing power of people and
therefor generates a high demand for goods and services (Baxa, Horvath and Vasicekek, 2014).
The demand side pressure is expected to increase price level. A very high inflation rate however

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hurts living standard by raising cost of consumption basket. Government therefore takes anti-
inflationary measures to stabilize the price level. In Australia, price stability is one primary goal
of monetary policy of Reserve Bank of Australia. The counter inflationary measures taken by
RBA helps to reduce inflation rate in Australia along with a stable growth rate.
Business Cycle
Business cycle offers an insight for growth fluctuations in an economy. Trend in
historical growth rate of Australia shows some high and low points. The high points represent
economic expansion while the low points indicate recession. Economic recession began in late
1990s continues to 1991 marking a sharp fall in output. The decade of 1990ended with an
economic peak in 1999. The continuous expansion of the economy ended with a peak growth
rate of 5.01 percent. The peak rate cannot sustain for a long time and the growth again fell in
early twentieth century (Klein, 2017). Slow expansion helped the economy to recover its growth
rate and in 2004 growth reached to 4.15 percent. The period of 2009 can be identified as a period
of severe recession. Growth rate in this year declined to 1.81 percent. At present, the economy is
moving slowly towards a phase of economic expansion.
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
-1.00
0.00
1.00
2.00
3.00
4.00
5.00
6.00
Real GDP growth rate
Year
Growth rate
Figure 3: Growth fluctuation and business cycle
Net export and AUD/USA exchange rate
The net contribution of international trade is captured by the terms net export which is
total export less of total import. Long since Australia has been participating in international

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trade. The trade share in GDP continuously increases since 1980. The share after reaching to a
very high level slightly declined after 2008. This is mainly due to the global financial crisis
occurred during that time. The advanced economies recorded a rapid decline in their export
demand. The main trade partners of Australia are China, Japan, South Kore, United States,
Singapore, New Zealand and Germany (Itskhoki and Mukhin, 2017). The export basket of
Australia includes mainly minerals and different services like travel, professional and financial
service. The import basket includes refined petroleum, medical equipment, Automobile
components and others.
An interdependence exists between Australia and USA. The effective price of a traded
good in the international market is determined from the ratio of exchange between home and
foreign country. The higher exchange ratio means a higher relative price and therefore a lower
net export. Relatively small exchange ratio means a smaller price of exported goods and hence a
higher trade balance (Cole and Nightingale, 2016). United States of America being on vital trade
partner of the Australia, Australian dollar valued in terms of US dollar has significant influence
on net export.
Table 4: Summary Statistics of net export and real exchange rate
Net Export Exchange rate
Mean
2015709344
3 Mean 1.35
Standard Error 6388333393 Standard Error 0.05
Median
3050218907
8 Median 1.33
Mode #N/A Mode #N/A
Standard
Deviation
3319475403
7 Standard Deviation 0.24
Sample Variance 1.10189E+21 Sample Variance 0.06
Kurtosis
-
0.710436358 Kurtosis 0.66
Skewness -0.59409697 Skewness 0.69
Range 1.17904E+11 Range 0.97
Minimum
-
5119810051
7 Minimum 0.97
Maximum
6670581633
3 Maximum 1.93
Sum 5.44242E+11 Sum
36.4
4
Count 27 Count 27
Table 5: Correlation matrix of net export and real exchange rate

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Net Export Exchange
rate
Net Export 1
Exchange
rate
0.85464402
1
1
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
-60000000000
-40000000000
-20000000000
0
20000000000
40000000000
60000000000
80000000000
0.00
0.50
1.00
1.50
2.00
2.50
Net export and Real exchange rate
Net Export Exchange rate
Year
Net Export
AUD/USD
Figure 4: net export and exchange rate relation
The average value of Australian dollar relative to US dollar is 1.35. This indicates on an average
1.35 Australian dollar required to be exchanged for one US dollar. The correlation estimate
suggests a positive relation between AUD/ USD exchange rate and net export. The graph above
shows that exchange rate and net export follow same direction of movement. This means an
upswing in the exchange rate associated with an increases in net export and a downswing in the
exchange rate is associated with a decrease in net export (Baumol and Blinder, 2016). As a
result, the maximum trade surplus of 66705816333 corresponds to the largest exchange ratio of
1.93 while the maximum trade deficit of 51198100517 is associated with the minimum exchange
ratio of 0.97.
Fed fund rate and RBA cash rate
Central bank of a nation charges a certain interest on borrowed capital by commercial
banks. This is the bank rate charged on overnight borrowed fund. This offers central banks a
control over the lending ability of commercial banks. The bank rate in Australia is known as cash
rate and is determined by the Reserve Bank of Australia (Argy and Nevile, 2016). This in USA is
fund rate and is determined by the Federal Reserve. Growing trade and investment relation
between Australia and USA has made the nation interconnected in several aspects. The fund rate
determined by Fed has an effect of on determination of cash rate in Australia. The tight monetary
policy by Fed in form of increased cash rate signal a relatively strong value of US dollar. The

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strong US dollar means a relatively week AUD which is beneficial for Australian trade. An
expansionary monetary policy by Fed on the other hands is followed by a monetary expansion of
RBA as well (Georgiadis, 2016).
Table 6: Summary Statistics of fund rate and cash rate
Summary Statistics
cash rate Fund rate
Mean
5.38370
4 Mean
3.04231
5
Standard Error
0.49351
2 Standard Error
0.47225
7
Median 5.125 Median
3.21333
3
Mode 6.5 Mode #N/A
Standard
Deviation
2.56436
3
Standard
Deviation
2.45391
9
Sample Variance
6.57595
7 Sample Variance 6.02172
Kurtosis
6.62617
8 Kurtosis -1.26609
Skewness
1.96211
3 Skewness
0.16008
6
Range
13.3333
3 Range 8.01
Minimum 1.5 Minimum
0.08916
7
Maximum
14.8333
3 Maximum
8.09916
7
Sum 145.36 Sum 82.1425
Count 27 Count 27
Table 7: Correlation matrix of cash rate and fund rate
cash rate Fund
rate
cash
rate
1
Fund
rate
0.758976462 1

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1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
Cash rate and Fed fund rate
cash rate Fund rate
Year
Rate
Figure 5: Relation between fund rate and cash rate
The estimate of correlation indicates a strong positive reaction between fund rate and cash rate.
This can be also seen from above graph. Every downward revision of fund rate is followed by a
corresponding downward revision of the cash rate. The cash rate however lowered by a
proportionately less magnitude than cash rate did. The gap between fund rate and cash rate
widens particularly aftermath of global financial crisis (Manalo, Perera and Rees, 2015). During
fund rate was set at a historically low level and was even below 1%. The cash rate though
reduced but was around 2-3 percent.
Outlook for Australia economy
The recent growth rate of Australia is less than level that is expected to be achieved. In
fact, in the last five years, the Australian economy is growing at a relatively slow rate. A slow
growth of consumption, slowdown of construction and mining, spillover effect from China’s
slow growth and low inflation expectation are some of the factors contributing to Australia’s
poor growth performance. There is still no reason to expect a recession in future years as several
other sectors of the economy shows sign of economic recovery (Rees, Smith and Hall, 2016).
Non-mining industrial and service sectors are expanding at a rapid pace in response to growing
business investment. Public investment on inventories and infrastructure moves the economy
toward economic prosperity. Because of a declining export demand for coal and iron ore export
composition has changed in favor of other resources line natural gas. The economic recoveries of
Australia will help the economy to make a transition towards a path of economic expansion.
Conclusion
Critical analysis of Australian economic performance finds that growth rate fluctuated
highly in the decade 1990s. With passes of time, a stable growth path has achieved for the
economy. Economic growth has a positive effect on employment. Under the purview of
monetary policy, the economy has achieved a stable price level. Similar to most other
economies, business cycle phases evidenced in Australia from high and low points of economic

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growth. The movement of exchange rate and net export suggests a positive association between
exchange rate net export. Increase in exchange value reflects currency depreciation and a low
export demand. Fed fund rate has caused a net drive to Australian economy. A monetary
expansion by Federal Reserves followed by the same policy taken on part of RBA.

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References
Argy, V.E. and Nevile, J. eds., 2016. Inflation and Unemployment: Theory, Experience and
Policy Making. Routledge.
Baumol, W.J. and Blinder, A.S., 2016. Principles of Macroeconomics. Cengage Learning.
Baxa, J., Horvath, R. and Vasicekek, B., 2014. How does monetary policy change? Evidence on
inflation-targeting countries. Macroeconomic Dynamics, 18(3), pp.593-630.
Cole, D. and Nightingale, S., 2016. Sensitivity of Australian trade to the exchange rate. Reserve
Bank of Australia Bulletin, pp.13-20.
Fontana, G. and Setterfield, M. eds., 2016. Macroeconomic Theory and Macroeconomic
Pedagogy. Springer.
Frank, A.G., 2018. The development of underdevelopment. In Promise of development (pp. 111-
123). Routledge.
Georgiadis, G., 2016. Determinants of global spillovers from US monetary policy. Journal of
International Money and Finance, 67, pp.41-61.
Gregory, R.G. and Smith, R.E., 2016. 15 Unemployment, Inflation and Job Creation Policies in
Australia. Inflation and Unemployment: Theory, Experience and Policy Making, p.325.
Hartwell, R.M., 2017. The industrial revolution and economic growth (Vol. 4). Taylor &
Francis.
Harvey, J.T., 2018. Intermediate macroeconomics: The importance of being post
Keynesian. Journal of Post Keynesian Economics, pp.1-16.
Itskhoki, O. and Mukhin, D., 2017. Exchange rate disconnect in general equilibrium (No.
w23401). National Bureau of Economic Research.
Klein, P.A., 2017. Analyzing Modern Business Cycles: Essays Honoring: Essays Honoring.
Routledge.
Manalo, J., Perera, D. and Rees, D.M., 2015. Exchange rate movements and the Australian
economy. Economic Modelling, 47, pp.53-62.
Meredith, D., 2015. Why Australia Prospered: The Shifting Sources of Economic Growth, by Ian
W. McLean. The English Historical Review, 130(543), pp.485-487.
Rees, D.M., Smith, P. and Hall, J., 2016. A Multi‐sector Model of the Australian
Economy. Economic Record, 92(298), pp.374-408.
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.