Economics Assignment: Interdependence of USA and Australian Economies

This economics assignment provides a comprehensive analysis of the economic relationship between the United States of America and Australia, spanning from 1985 to 2016. The report delves into the dynamics of their trade and investment flows, examining key economic indicators such as GDP growth rates, Foreign Direct Investment (FDI), interest rate fluctuations, and Australian dollar volatility against the US dollar. It critically evaluates the ongoing debate regarding the dependence of the Australian economy on the USA's economic performance, considering the impact of major events like the Global Economic Crisis. The analysis utilizes comparative data and economic principles to assess the degree of interdependence and the influence of the USA's economic policies and performance on Australia's economic health. The report also explores the effects of Free Trade Agreements and other economic factors. The conclusion offers insights into the nature of this economic relationship.

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

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Table of Contents
Introduction:...............................................................................................................................................2
Economic Relationship between the USA and Australia:.............................................................................2
The ongoing debate regarding dependence dynamics:...............................................................................3
Critical Evaluation:.......................................................................................................................................4
Counter-Observation:................................................................................................................................12
Conclusion:................................................................................................................................................14
References.................................................................................................................................................15

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Introduction:
The global economy has experienced considerable changes in its dynamics with time and advent
of newer economic dimensions and players in the international scenario. With globalization,
technological innovations, increase in the worldwide mobility of goods and services as well as factors of
production and dissemination of knowledge and innovations across the globe, the trade relations
between the countries have also undergone significant changes. In the earlier times, the term trade only
referred to the exchange of goods and services produced between two countries or regions participating
in the trade. However, with the business and political relations between the countries becoming more
inclusive and open in nature, following the globalization and opening of new avenues to facilitate trade
and communications, almost all the countries in the world are now getting connected to one another in
a more cumulative way (Buiter and Rahbari 2012). In the recent and more complex global economic
scenario, the economic and trade policies of a country not only affect the economy of the concerned
country itself, but also the effects the economies of the countries with which it has trade and other
economic relations. The report tries to look into this aspect of interdependence of global economies in
the recent times. More specifically, the report tries to analyze the effects of the changes of the policy
structures and GDP statistics of the economy of the United States of America on the economic
conditions of one of their primary trading partners, Australia. To study the same the report takes a
standard time span between 1985 to 2015-2016 and compares the performances of both the countries
with respect to different economic variables to get a picture of the dependence (if any) of the economy
of Australia on the dynamics of the economy of the USA (Auerbach and Gorodnichenko 2012) .

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Economic Relationship between the USA and Australia:
The recent global economic scenario has several predominant players, whose method of
operations and dynamics in the monetary and fiscal policy frameworks, significantly affect the dynamics
in the international economic scenario. Two of those dominant players, having immense significance in
the international economy are the economies of the United States of America and that of Australia.
These two economies, again, have significant political and socio-economic connections with one another
and the relationship between these two countries, especially trading and overall economic relationships
have undergone huge dynamics over the last few decades (Dowding and Martin 2017).
Over the years, the USA and Australia have shared one of the strongest and most symbiotic
trade relationships in the world, which not only grew stronger with time but also helped both the
countries to prosper significantly due to the symbiotic nature of the relationship between the two
countries. The USA is the fourth largest of the export markets of Australia, with the country exporting a
massive share of its surplus production to the markets of the United States of America. The USA is also
the second largest import source for Australia. The two countries also share a robust relationship in
terms of Foreign Direct Investments, with the USA being the largest investing country in Australia and
Australia being the fifth largest in that of the USA (Dyster and Meredith 2012). The commercial
relationship between these two countries gained even more strength with the implementation of the
Free Trade Agreement between them. This agreement, which came into effect from 2005, was mainly
designed with the objective of facilitating bilateral trade between the two countries, by eliminating
trade hurdles like tariff and quota restrictions, as far as possible, especially in the primary and necessary
goods and services sectors, including agriculture and textile industries. The main objective behind this
agreement was to make necessary provisions, such that both the countries could enjoy their respective
comparative advantages and economies of scales and utilize their surplus productions more efficiently
(Cooper 2014).

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The ongoing debate regarding dependence dynamics:
The trade relationship between the USA and Australia has long been a topic of enough
speculation and research among the economists and policy-makers across the world. There has been
substantial amount of debate regarding the nature of this relationship. The commercial and economic
relationships between the two countries, as discussed above, shows that the size of investments of the
USA in Australia is much bigger than the size of investments of Australia on the USA (Groenewegen and
McFarlane 2014). USA also poses as one of the most important source of import for the country,
whereas Australia, though being an important exporter to the economy of the USA, is one of many
exporters to the country. Given this scenario and taking into account the fact that the USA is the most
influencing economic power in the global scenario, with many global dynamics depending upon the
strategies and policies of the country alone, there has been continuous debate among the economists
regarding the nature of trade relationships between the two concerned countries. The debates have
been mostly on the effects (if any) of the changes in the economic parameters of the USA on the overall
economic conditions of that of Australia (Browne 2012).
One school of economic though believes that the changes in the economic growth and GDP
statistics of the USA have significant implications on the economy of Australia due to the presence of a
trade relationship between the two countries, where the USA is the bugger player and Australia is the
smaller one. However, they are countered by another school of thought, who tries to assert that there is
no substantial proof of dependence of the Australian economic conditions of the dynamics in the
economy of thee USA (Armstrong 2015).

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Critical Evaluation:
The above debate can be critically evaluated by observing the economic and the economic
growth indicator of both the country and their dynamics between the time span of 1985 to 2015. The
economic growth of the two countries can be observed by the GDP growth rate of the two countries and
the fluctuations in the growth rates, which is shown in the following two-paneled diagram:
Figure 1: Comparison between the GDP Growth Rate of the USA and the Australia
(Source: Data.worldbank.org, 2017)
The above comparison between the growth rates of both the countries shows that both the USA
and Australia had undergone significant fluctuations in their growth dynamics over the last few decades,

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the fluctuations being related to one another at several instances. One trend can be noticed from the
above figure, by just looking at the fluctuations themselves. The economy of the USA and Australia has
experienced many similar fluctuations at similar points of time, though the magnitudes have been
different. In simpler words, there are several points of time, when both the economies experienced
peaks or troughs, the troughs being more frequent and seeming to be related more than the peaks. For
example, within the time period of 1990-1992 and 2007-2010, both the countries experienced negative
trend in their GDP growth rates, thought their relative magnitudes were different. During 1998, the
growth rates of both the countries were significantly upward rising.
These correlations between the fluctuations and dynamics of the GDP growth rate of the two
countries, though can be only observed with the help of the diagram, their reasons and implications can
be explained with the help of the economic concepts and evidences.
The economic conditions of one economy generally tend to have implications on another
economy, when the former has robust trade relations and investment dynamics with the other
countries. In case of the USA and Australia, as has been discussed above, the former has been one of the
biggest investor in the economy of Australia, with much of the American investors and entrepreneurs
venturing in the Australian market.

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Figure 2: Comparison between the FDI of other countries in Australia and the FDI of Australia in other
countries
(Source: Economist.com, 2017)
It is evident from the above figure that the FDI flow between the two economies of Australia
and that of the United States of America has been large in both the directions. Australia has received a
significant share of its FDIs from the USA, consistently in the last few decades and the country also
invests significant amount in the American economy. Therefore, much of the prosperity of Australia
depends on the economic welfare of the USA as the health of the latter economy can play a key
determining factor in both ways (Kirchner 2012). On one hand, a deterioration of the growth of the USA
can influence the amount of FDI Australia receives from the country as well as the returns on those FDIs

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which Australia does in the USA. The situation is also applicable the other way round. However, the USA
being a significantly bigger economy than that of Australia, enjoying more dominance and significant
influence on the global economic scenario, there may be chances that the dynamics in the economic
conditions of the USA might affect the economic health of Australia than the other way round. However,
this hypothesis can only be asserted to be real, only after studying the dynamics of the causal and
dependant economic variables of both the countries, having relevance to the investment scenario
(Berger et al. 2013).
The main factor affecting the inflow of Foreign Direct Investments in any economy from some
other economy is the difference in the rate of interests prevailing in both the economies. Generally,
investors tend to move from regions of lower interest rates to the regions of higher rate of interests as
the latter tends to provide more returns to their investments. There is also a relationship between the
interest rate of a country and the foreign exchange rates of that country, with respect to other
countries. Generally, a higher interest rate is associated with a higher value of domestic currency of a
country, thereby exerting a positive pressure on the currency exchange rate of the concerned country.
This relation can be studied for the two concerned countries to find out whether actually the dynamics
in the economy of the USA have any effect on the economic conditions of Australia (Armstrong 2015).

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Figure 3: Comparison between Australian dollar volatility (With respect to USD) and Australian interest
rate volatility
(Source: Data.worldbank.org, 2017)
Surprisingly, the above figure, showing the comparison between the interest rate dynamics of
the country and the volatility of the Australian dollar with respect to the US dollar, does not abide by the
general norm as suggested by economic principles (Bussière, Delle Chiaie and Peltonen 2014). As seen
from the above figure, the dynamics does not seem to be heavily related as the fluctuations in both the
aspects have occurred at different points of time with different magnitudes and there are not much
relevance observed between the two variables (Bown and Crowley 2013).
The economic phenomena, occurring in both the countries in the last few decades, to some
extent, support this study finding. One of the major example which supports the data in the above figure
is that of the Global Economic Crisis, which initiated in the USA during 2007-2008 and affected the

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economy of the country drastically and also percolated to the other players in the global economic
scenario (Jenkins et al. 2012).
The Great Recession, which started due to the bursting of the huge bubble created in the
housing market of the USA, led to an immense downturn in the economic activities and the overall
economic growth of the country. The situation led to bankruptcy of many huge players in the global
investment market, including that of the Lehman Brothers, which had immense repercussion on the
economy as well as on its trading partners. Europe being one of the primary trading partners of the USA
and having a significant bilateral investment relation with the country experienced a major blow on their
economy (Bagliano and Morana 2012).
However, the effects of this recession were surprisingly not that adverse on the economy of
Australia, as it was expected to be, Australia being one of the primary trading partners of the USA. The
Australian economy remained comparatively unaffected by the recession, which occurred in the USA.
The housing prices of the country and the overall investment and interest rate statistics remained
consistent and stayed at a standard level, which was not expected to be the case (Jenkins et al. 2012).

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Figure 4: Inter-country comparison
(Source: Economist.com, 2017)
As can be seen from the above figure, the housing prices though fell significantly in the USA
during the occurrence of the Great Recession, the prices showed an upward trend in that of Australia.
The main reasons behind this impressive performance of Australia, during that period, were the internal
robust monetary and fiscal policy framework and the sensible operation of the Australian bankers,
which to a considerable extent averted the negative consequences of the bursting of the housing bubble
in the USA.

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Figure 5: Comparison of the interest rates of different countries including Australia and the USA
(Source: Ustr.gov, 2017)
The above figure shows that the economy of Australia did significantly well during the
recessionary period, especially in the monetary sector of the economy. Apart from the impressive
performance of the banking and financial sectors in the Australian economy, the above phenomenon
can be attributed to the dynamics in the trade relations of the country with the rest of the world.
However, in the earlier times, USA was the foremost of the trading partners of the country, with much
of its external sector depending on the economy and trading policies of the USA, with time Australia
build robust trading relationships with other global economic powers like China and Japan. This reduced
the effects of the Great Recession on the economy of Australia (Mody, Ohnsorge and Sandri 2012).
Counter-Observation:
It is evident from the above discussion that, Australia, in spite of being one of the most
prominent business partners of the USA, managed to get over the Great Recession, without being much
affected by the housing market and stock market crash in the USA. However, the recent phenomena and

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observations do not completely rule out the possibility of the influence of the monetary and fiscal
conditions of the USA on the same of the economy of Australia.
The recent recovery of the economy of the USA from an interest and exchange rate turmoil has
been initiated with the increase of the benchmark rate of the US Federal Reserve above zero, which in
turn signifies the coming back of the world’s most influencing economy to the steady state. However,
this phenomenon has a direct impact on the exchange rate between the USA and Australia, as it is
supposed to rise the US Dollar against the Australian dollar, thereby increasing the competitiveness. This
in its turn, as being speculated by the economists all over the world is expected to raise the overall price
level in the Australian economy as much of its export-import relationship is with the USA only (Gray
2013).
Figure6: Total Investment Abroad by Australia
(Source: Ustr.gov, 2017)

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The above figure shows that of all the trade relations of Australia, the country having the
greatest significance in the Australian investment scenario is the USA. The USA not only attracts FDI
from the country but also is the primary source of FDI for the country. Given this scenario, the rise in the
valuation of US Dollar with respect to the Australia dollar is expected to hit the price levels of the later.
This asserts the fact that Australia does not remain unaffected by the changes in the economic variables
like the real GDP, interest rates and exchange rates of the USA. These variables, especially in the current
times with the expansion of trade relations and inter-country dynamics, tend to affect the economy of
Australia and their monetary and fiscal framework significantly (Tse and Zhao 2012).
Conclusion:
It is evident from the above discussion, which tries to analyze the impact of the changes in the
economic indicators of the USA on the economy of Australia, that both the country have significant
trade and economic relations with each other. These relations, over time has strengthened and has
become more dynamic with lot of measuring and determining variables coming in the scenario and the
business relations becoming more widespread and complex. The USA being the bigger and more
influential economy among the two, is expected to have significant impact on the economy of Australia.
However, this argument has sufficient evidences not only in favor of it but also against it. The argument
against this speculation shows relatively less dependence of Australia on the economic dynamics of the
USA, with the real evidences from the period of Great Recession. However, the counter arguments try to
show the high influence of the economy of the USA on that of Australia, with the help of the existing
speculation and evidences of the rise in the overall price levels which the country is experiencing due to
the recovery of the interest rates and currency value of the economy of the USA. Therefore,
cumulatively taking into account the overall relationship of the two countries, it can be asserted that
Australia to some extent is obviously influenced by the economic changes of the USA, the extent varying
with time and dynamics of the relationship of the two countries.

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References
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of International Affairs, 69(5), pp.513-537.
Auerbach, A.J. and Gorodnichenko, Y., 2012. Fiscal multipliers in recession and expansion. In Fiscal Policy
after the Financial crisis (pp. 63-98). University of Chicago press.
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economy. Journal of Banking & Finance, 36(1), pp.1-13.
Berger, A., Busse, M., Nunnenkamp, P. and Roy, M., 2013. Do trade and investment agreements lead to
more FDI? Accounting for key provisions inside the black box. International Economics and Economic
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