Deakin University MAE203 Report: Global Economic Analysis

This report analyzes the global economy, highlighting significant downside risks to growth, including the US-China trade war, trade restrictions, the Chinese economic slowdown, and Brexit uncertainties. It examines the impact of these factors on global trade, investment, and economic stability, referencing sources like the IMF and OECD. The report also delves into the Australian Newstart program, discussing the debate over increasing benefits and the concept of transfer payments. It explains the aggregate expenditure method and how increased transfer income can affect inflation and government debt. The author uses an aggregate expenditure model to illustrate these concepts, concluding that increasing Newstart benefits could lead to inflation. The report incorporates references to various economic publications and provides a comprehensive overview of the global economic landscape and its challenges.

Running head: GLOBAL ECONOMY
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Article 1
RBA Governor, Philip Lowe, has mentioned about downside risks to the global economy
that would lead to a slower global economic growth. As the global economy is moving forward,
there are certain on-going economic phenomena that are creating severe downside risks for the
positive and steady growth of the international economy. According to Lowe, the US-China
trade war, trade restrictions and slower growth of China and Brexit related uncertainties are three
major risks that are affecting the global economic growth in a significant manner (rba.gov.au
2020). These phenomena are interrelated and therefore have multiplied impact for slowing down
the global growth and increasing financial vulnerabilities. The trade war between the US and
China has quite negative effect on the global trade, as that is not only affecting the trade flows
between these two nations, but also slowing down the global trade flows as well as investments
through the increase in the trade barriers. The on-going uncertainties about the trade policies are
risks for jobs, living standards and international investments, as higher restrictions imply
reduction in investments and job opportunities and decline in living standards, coupled with
higher business production costs (imf.org 2019). A trade agreement between the US and China in
the near future is also uncertain regarding the terms and restrictions, which would affect the
trade-dependent industries, such as, automobile and its parts. According to IMF, the increased
tariffs between the USA and China are estimated to cut the global GDP by 0.5%, worth of US
$455 billion in 2020 (Aruna 2019).
Secondly, the Chinese economy suffered from a major and sharp slowdown due to the
trade war and its trade partners are also suffering from the blow. According to OECD (2019), a
fall of 2% points in the domestic demand growth in China for consecutive two years would
reduce the growth of global GDP by around 0.4% in the first year, and the impact would be

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higher on the economies of East Asia, especially the commodity producing countries and Japan.
In the global economy, the spillovers from the Chinese slowdown are creating uncertainties
regarding the investment level and the returns. Thus, volume of trade and investments would fall
for the trade partners of China across the world, which would affect their domestic economic
condition, if the Chinese slowdown continues.
Thirdly, the Brexit related uncertainties are another risk factor for the global economy.
The uncertainties regarding the terms of exit of the UK from the EU arise from various
dimensions and these also have effects of different magnitude on different sectors of the
economies. The major blow would be faced by the export and import sector of the UK and the
trade partners of the UK would also face the rippled effects. It is assumed that after Brexit, the
UK would come under the rules and regulations of the WTO and that would imply rise in the
tariffs, which would reduce the GDP of the UK by approximately 2% in the coming two years.
OECD assumes that this would have adverse impact on the level of trade ad investments not only
in the UK, but also in the global economy (Oecd.org 2019).
Thus, there are significant financial vulnerabilities in the global economy, and there are
multiple factors that create risks, such as, debt burdens, lower interest rates, expansionary
monetary policy and repricing of the financial markets. However, trade restrictions, the US-
China trade war and Chinese economy slowdown and Brexit uncertainties are the major ones that
create immediate risks for the global economic growth.

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Article 3
The Australian federal government has kept the perks and payments of the Newstart
program unchanged for almost more than two decades. The Newstart program is an
unemployment benefit program in Australia. There has been demands for raising the amount of
benefits from $277.85 a week for a single individual to $370 a week. This would push the
unemployment benefit to go up to 50% of the minimum wage in the country. These type of
benefits are known as transfer payment. However, according to the market research by KPMG,
there are around 700000 to 710000 people, who receive Newstart, and if the cost is raised to
$370 per week, that would cost the government an additional expenditure of $3 billion to $3.5
billion (sbs.com.au 2019). The supporters of increasing Newstart benefits argued that in 1994,
the benefits of Newstart were 30% of the average weekly wage of the employees of the retail and
restaurant and accommodation sectors, which are generally the lowest paid sectors. In the current
year, if the benefits are increased to $370, then it would again bring a parity by lifting the
benefits to 30% of the average weekly age of those sectors. Thus, there are some ongoing
conflicts going on regarding the increase in the Newstart benefits for the unemployed.
Transfer payment refers to the exchange transactions in which there is a donor party and
a recipient party and the donor gives up something valuable without receiving anything in return.
The parties can be individuals, organizations, government agencies etc. Transfer payment is
often referred to a method of redistribution of wealth and income, conducted by the government
through payments and without any product or service in return (Goodwin et al. 2015). These type
of payments are generally non-exhaustive as they do not produce any direct output. Some most
common transfer payments are financial aid, welfare benefits, health benefits, unemployment

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benefits, social security and government subsidies. The intention of increasing transfer payments
in an economy is to boost employment and industrial activities, however, as these are provided
by the government and no output is produced, the purpose of boosting industrial activities and
employment is not fulfilled (Mankiw 2020).
The aggregate expenditure method in an economy calculates the current monetary value
of all the completed products and services. It is represented by the summation of all types of
expenditure incurred in the economy by all the factors over a specific period of time.
The equation for aggregate expenditure model is:
AE=C + I+G+ NX
Where, AE is aggregate expenditure, C is household consumption, G is government expenditure
and NX is net export. In other words, this method is used for calculating GDP in terms of
expenditures in an economy (Heijdra 2017).
Transfer income implies exchange of money with no goods or services being produced
during the period. It results in one way flow of money in the economy, that is, income earned by
the individuals without producing any product or rendering any service. Hence, when the transfer
income increases, the element of government expenditure (G) increases in the equation of
aggregate expenditure. When the government expenditure increases in an economy, the money
supply increases. However, in case of transfer income, as no output is being produced, the level
of GDP does not increase. On the other hand, increase in money supply in the economy results in
higher purchasing power of the people and this leads to rise in the demand for goods and services
in the economy. Since, the level of production does not increase at par with the aggregate
demand, excess demand arise in the market and that eventually leads to inflation. Increasing

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transfer payment would increase the burden on the government, which might push up the
government debt, while GDP remains low (Mankiw 2020).
Figure 1: Aggregate expenditure method and increase in transfer income
(Created by author)
In the above image, the aggregate expenditure curve, real GDP and equilibrium are
represented. E represents the market equilibrium where aggregate demand equals aggregate
supply. At L, output level is less than the aggregate expenditure in the economy. This is the case
of increase in transfer income in the economy, other things remaining same. When the
government raises the amount of transfer income, the level of total expenditure rises in the
economy while output (GDP) level does not increase. Hence, the gap between real GDP and
aggregate expenditure exists.
Thus, it can be said that the benefits of the Newstart program should not be increased as it
would lead to rise in inflation in the economy in the long term.

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References
Aruna, P., 2019. IMF: Global economy facing serious downside risks. [online] The Star Online.
Available at: https://www.thestar.com.my/business/business-news/2019/06/24/imf-vital-for-
malaysia-to-boost-policy-buffers [Accessed 17 Jan. 2020].
Goodwin, N., Harris, J.M., Nelson, J.A., Roach, B. and Torras, M., 2015. Macroeconomics in
context. Routledge.
Heijdra, B.J., 2017. Foundations of modern macroeconomics. Oxford university press.
imf.org, 2019. World Economic Outlook Update, July 2019: Still Sluggish Global Growth.
[online] IMF. Available at:
https://www.imf.org/en/Publications/WEO/Issues/2019/07/18/WEOupdateJuly2019 [Accessed
17 Jan. 2020].
Mankiw, N.G., 2020. Principles of macroeconomics. Cengage Learning.
Oecd.org, 2019. Global Growth Weakening as Some Risks Materialise. [online] Oecd.org.
Available at: https://www.oecd.org/economy/outlook/global-growth-weakening-as-some-risks-
materialise-OECD-interim-economic-outlook-handout-march-2019.pdf [Accessed 17 Jan. 2020].
rba.gov.au, 2020. Statement by Philip Lowe, Governor: Monetary Policy Decision | Media
Releases. [online] Reserve Bank of Australia. Available at: https://www.rba.gov.au/media-
releases/2019/mr-19-27.html [Accessed 17 Jan. 2020].

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sbs.com.au, 2019. Newstart inquiry expected to prompt fresh wave of calls to lift payments.
[online] SBS News. Available at: https://www.sbs.com.au/news/newstart-inquiry-expected-to-
prompt-fresh-wave-of-calls-to-lift-payments [Accessed 17 Jan. 2020].