Macroeconomics Assignment: Analysis of Australian Economy (ECON910)

This assignment analyzes macroeconomic objectives and the Australian economy, focusing on the impact of China's economic slowdown. It defines and explains the four main macroeconomic objectives: full employment, high and sustainable economic growth, price stability, and external balance...Read More

Running head: MACRO ECONOMICS
MACRO ECONOMICS
Name of the Student
Name of the University
Author Note

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Table of Contents
References................................................................................................................................10

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a) The global economy which includes Australia is going down since Economic growth
of China continues to slow down(ABC News,2020). Global economic growth is likely to
reach a 8 years low of 2.5 per cent. It is deteriorated significantly due to US-China trade war.
According to Fitch, it is likely to become 2.6 per cent in 2019 which is a noteworthy fall from
the previous year which was 3.2 per cent. In September, 2019, the economy of Australia
decelerated to the most lethargic stride in a decade. The growth was of 1.4 per cent which is
well below of what forcasted by the Reserve Bank. The official figures was published by
China which explains that its “trade war” with US was causing hurt to its economy. The GDP
of China rose at a 6.2 per cent which is the lowest in three decades. The economy of Australia
are indissolubly knotted to its trading partner China. According to the “Department of
Foreign Affairs and Trade”, in 2017-18, export of Australia of more than 30 per cent were
sold to China(Hatfield-Dodds and et al., 2015).
b) Macroeconomics is concerned with objectives which affect the whole economy. The
four major objectives are:
1. Full employment
2. A high and sustainable economic growth rate
3. Price stability
4. External Balance
1. Full Employment- When everyone in the economy who is willing to work can find jobs
that situation is called full employment situation. It has been observed that zero
unemployment is an impossible situation which is due to the existence of structural change
and frictional unemployment. “Frictional unemployment” is the unemployment which exists

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when people are in the procedure of changing from one job to another. “Structural
unemployment” is due to technical alteration rather than fluctuations in “demand or supply”.
In Australia, “the natural rate of unemployment” is the lowest rate which can be attained
without any “inflationary” pressures developing which appears about four per cent in
Australia. The growth rate of working age population of Australia decreased during the
1990s, which is mainly due to achievement of the “baby boomers” entrance in the pertinent
“age cohort”. The participation rate of women rose more sluggishly for the periods than they
used to have in the nineteen eighty’s. So, growth of the “labour force” was much lesser than
in the nineteen eighty’s. Employment growth was on average lower at 1.3 per cent per
annum. In the late 1989, “unemployment” was at a 10 years less which is below six per cent.
Pessimism about the forecasts for deteriorating “unemployment” grasped new highs.
“Unemployment” started to reduce in 1994.
2. A high and sustainable economic growth rate- The growth rate is significant in
explaining the nation’s future opportunity set. The rising capability of the economy to mollify
the wants and needs of its associates. The desirable growth rate is four per cent. The
economic growth is usually calculate by change rate in GDP. There is a sustainable rate is
between three to four per cent per annum. When the growth is very fast which leaks blocks in
the economy and will put severe pressure on prices. If the economic growth is too slow, then
resources are not completely utilised. In Australia, between 2005 to 2007 the thriving
economy saw low level of unemployment, there are shortage in skills in numerous sectors
and heaviness on prices. The suffering of Australia was not as much as other economies in
the year 2008. There was a average growth 3.5 per cent in the 1990s as a entire which was to
some extent greater than in the nineteen eight’s which is lesser than nineteen sixty’s by a very
decent margin. By comparing the growth of 1990s with growth of 1980s, the difference is no
much in terms of “average output growth”. There is a difference which is greater in the

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performance of inflation which is to be occupied up below. There are 2 things about rate of
growth is one, since “population growth” in the nineteen ninety’s which was slow as
migration reduced and there was a fall in birth rates, it has been noticed that “per capita
growth” was quicker than in the nineteen eighty’s. The actual case was “per capita Gross
Domestic Product growth” in Australia was the quickest since the nineteen sixty’s. It is
something where Australia takes part only with Ireland among the “OECD” nations. The
second is growth of gross domestic product was less instable in the nineteen ninety’s than in
any of the preceding three decades. This volatility had been decreasing every decade. But it
has been noticed that it fell in the 1990s.
3. Price stability- The Reserve Bank of Australia has an obvious inflation target. To persue
the objective of “intermediate term stability” of price, both the “Reserve Bank and the
Government” make an agreement on the purpose of keeping inflation of consumer pice
between two to three per cent, on average which is over “business cycle”. It is important to
achieve the stability of price because “inflation” has an opposite effects on firms and
households, wears away international competitiveness, which misrepresents the income
distribution and impacts the division of resources throughout the economy. The 1990s
noticeable a most important break from the regrettable “inflation” performation of the
nineteen seventy’s and nineteen eighty’s. Consumer Price Index inflation peaked at around
eighteen per cent in Australia by early 1975 which is after the “wage break-out” and the “oil
shock” and of 1973 and 1974 , which has reached 10 per cent. By the last month of 1980s
“inflation” was still 7 per cent and it was an average nine per cent over next 2 decades. The
expectation of “inflation” remained high for coming decades.
4. External Balance- The objective is to make a balance the exterior transactions between
other nations and Australia. It is to attain a sustainable “trade balance” which is to evade
extreme fluctuatios of “exchange rate” and have a sustainable “foreign debt ratio” as

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proportion of gross domestic product. The Australian government has less control over the
external balance. The Balance of Payment accounts overall balance which is between capital
and current accounts. As there was the floating rate of the Australian dollar from 1983, so the
government has no control over the exchange rate.
From the given variables first is GDP growth. It is the only best measure of a
country’s economic wellbeing. It accounts the aggregate value of goods and services what is
produced in a nation in a particular year. “GDP= Consumption+ Investment+Government
Spending + Net export”(Ramasamy and Abar, 2015). There are avarious approaches of
accounting GDP which are “Expenditure Approach” which accounts the last spending on
products and services. “Product Approach” which accounts he value of a market of products
and services. And “Income Approach” which aggregates the income received by all
producers in the nation. Taxes and rate of interest have an influence over gross domestic
product over time. There are some non economic factors which include war, drought and man
made disasters(Cross and Poon, 2016).
Figure- 1
Source – Created by author
From the above diagram, it can be shown that the GDP varies over the period of time.

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Inflation- Inflation measured by “inflation rate” which refers to the per cent rate of rise in the
“average level of prices” which is measured against a normal level of purchasing in the
economy. The latest figure of inflation has been published by “Trading Economics”, the
inflation rate was 2.10 per cent in December 2009.
Figure -2
Source- created by author
The annual inflation rate in Australia increased to 1.8 per cent in the last quarter of
2019 form 1.7 per cent in the previous period and there are market expectation which is
above of 1.7 per cent. It has been noticed that it was the highest inflation rate in a year since
cost of non alcoholic beverages and food increased to an over 5 year high.
Cash rate- “Cash rate” is the rate of interest that a central bank such as the “Reserve Bank of
Australia” will charge commercial banks for loans. It is also called “bank rate”. While
commercial banks has the right to freely fix their own rates of interest to borrow the rates
which they charge on credits and offer on savings tend to be derived from the cash rate.
C) The bank disclosed that it was rational to anticipate that an prolonged time of less rate
of interest would be needed in Australia so that it can make unrelenting growth towards “full

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employment” and attain more certain growth in the direction of the “inflation” target. The
low “interest rate” is to stay. It means the “cash rate” will grasp at 1.00 per cent for a longer
time. Every day of trading the “Australian Stock Exchange” gives apprises of its Reserve
Bank of Australia Rate Indicator. It gives a very stimulating picture of the “cash rate”
predictions of the market. Most experts expect another cut very soon. The unemployment
pictures will be worse than the Reserve Bank of Australia have some expectations and push
them to cut again. Westpac Chief Economist whose name was Bill Evans who baptized an
“October rate cut” back in July,2019. According to Evans, by October, it can be expected that
the way of the rate of unemployment will be adequately conflicting to the Reserve Bank of
Australia’s plans that it will have correct explanation to affluence policy earlier than it has
been previously anticipated. The confidence of the consumer is down. The Reserve Bank of
Australia desires lower “unemployment” and it has a target of “inflation” of three per cent.
“Wage growth” has been hurt by increasing unemployment which will again cause hurt to
“inflation” by reducing spending of the consumer. The current retail expenditure statistics
from the “ABS” showed a little reduction in expenditure. The “Reserve Bank” may require to
reduce again to stab and rouse the nation again. The 2 successive cuts did not have much
consequence except on “prices” of property which have begun to increase. This is an
expected consequence of several factors which includes a comparative deficiency of
“properties” on the market.
Monetary Policy through the result of the “exchange rate” affects the economy. Again
“exchange rates” are inclined by many factors which are rate of interest and commodity
prices. “Monetary policy” is set by the “Reserve Bank of Australia” to have an influence over
the “money supply” and loan within the nation to stimulate growth and to stable the financial
system.

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When “Reserve Bank of Australia” buys goverement bonds to raise “liquidity”, it will
result a lesser rate of interest and lower “unemployment”. In the times of greater inflation,
Reserve Bank of Australia sells “government bonds” which creates a increase in interest rate.
Following are the effects of “monetary policies”-
1. A tight monetary policy in the short run leads to a weakening in the prices of services and
products at the same time it will higher disposable incomes which will rise the demand for
the household.
2. In the long run, demand of household declines due to fall in income and it will raise
unemployment.
When interest rate is low, it will make it less costlier to borrow which leads to inspire
investment and spending. This tends to higher aggregate demand which will again higher the
country’s economic growth. Lower rates of interest will decline the saving incentive, less
costlier borrowing costs,lesser “mortgage interest payments”, depreciation in the “exchange
rate”,increasing prices of the assets,. In fact, lesser rates of interest must increase in
“aggregate demand” which help in rice in consumption, investment and net export.
d) The “exchange rate” measures the one currency prices which is uttered in terms of
another currency(Rohloff,2018). There are 2 most ideal measures of the “Australian dollar
exchange rate” which are the “bilateral exchange rate” against the United States dollar and
the “trade-weighted index”(TWI). The TWI will provide a measure of whether Autralian
“dollar” is rising or falling on average which is contrary to the currencies of its trading
partners.

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References
ABC News, 2020. Fitch Downgrades Australia's Economic Growth, While Rabobank Tips
'Modest' Global Recession. [online] ABC News. Available at:
https://www.abc.net.au/news/2019-10-02/fitch-downgrade-australia-economy-global-
recession-rabobank/11567246
Bajada, C., 2017. Australia's Cash Economy: A Troubling Issue for Policymakers: A
Troubling Issue for Policymakers. Routledge.
Cross, J. and Poon, A., 2016. Forecasting structural change and fat-tailed events in Australian
macroeconomic variables. Economic Modelling, 58, pp.34-51.
Dara, N.R., Does India Increasing Potential Inclusive Growth Polices? A Critical Analysis.
Garnaut, R., Baxter, P. and Frueger, A.O., 2017. Exchange rate and macro-economic policy
in independent Papua New Guinea. Canberra, ACT: Development Studies Centre, Research
School of Pacfic Studies, The Australian National University.
Hatfield-Dodds, S., Schandl, H., Adams, P.D., Baynes, T.M., Brinsmead, T.S., Bryan, B.A.,
Chiew, F.H., Graham, P.W., Grundy, M., Harwood, T. and McCallum, R., 2015. Australia is
‘free to choose’economic growth and falling environmental pressures. Nature, 527(7576),
pp.49-53.
Hossain, A.A., 2014. Monetary policy, inflation, and inflation volatility in Australia. Journal
of Post Keynesian Economics, 36(4), pp.745-780.
La Cava, G., Hughson, H. and Kaplan, G., 2016. The household cash flow channel of
monetary policy. Reserve Bank of Australia, Research Discussion Papers, 12.

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Mammadov, F., 2014. Central Bank Credibility and Black Market Exchange Rate Premia: A
Panel Time Series Analysis.
Manalo, J., Perera, D. and Rees, D.M., 2015. Exchange rate movements and the Australian
economy. Economic Modelling, 47, pp.53-62.
Oxford Analytica, New Australian majority must tackle a raft of problems. Emerald Expert
Briefings, (oxan-db).
Ramasamy, R. and Abar, S.K., 2015. Influence of macroeconomic variables on exchange
rates. Journal of economics, Business and Management, 3(2), pp.276-281.
Rohloff, S., 2018. Do Commodity Prices Affect the Australian Real Effective Exchange Rate:
A Real-Time Quantile-Regression Analysis. Available at SSRN 3253025.
Ruming, K., 2014. “It wasn’t about public housing, it was about the way it was done”:
challenging planning not people in resisting the Nation Building Economic Stimulus Plan,
Australia. Journal of housing and the built environment, 29(1), pp.39-60.
Shahiduzzaman, M. and Alam, K., 2014. Information technology and its changing roles to
economic growth and productivity in Australia. Telecommunications Policy, 38(2), pp.125-
135.
Taylor, J., 2018. The relative economic status of indigenous Australians, 1986-91. Canberra,
ACT: Centre for Aboriginal Economic Policy Research (CAEPR), The Australian National
University.

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