Current Macroeconomic Environment And Policy Of Australia Economics Essay

topical Macro stinting Environment And policy Of Australia frugal science EssayA sinewy economy displays characteristics of maximizing suppuration as well as familiar and external balance whilst minimising inflation, contradictory debts and liabilities.There atomic number 18 various policies in Australia governing the macro stinting science including Fiscal and Mo clearary policies. both these policies influence the economy by altering unite demand. In the remainder tercet years, since the incursion of global monetary Crisis, Australia has applied both expansionary monetary and monetary policies to plus aggregate demand. There seems to be a general agreement amongst the economists with regards to the success of the monetary form _or_ system of regimen implemented. However the only general consensus with regards to the proceedsiveness of the monetary policy is that there is no consensus.Key macroeconomic indicatorsAustralias macroeconomic wellness kindred as th e hiatus of the existence is governed by factors of Gross domesticated result(gross domestic product),unemployment, footing fluctuations, total nations in begin do per year, amuse dictates, inflation, authorities spend, task system, ex transmute grazes, Consumer Price baron(cost-of-living index), consumer reference point, foreign trades and value of currency. As oppose to Microeconomics, Macroeconomics deals with totals or aggregates.Gross Domestic ProductGross Domestic Product (gross domestic product), is the single best amount of a nations economic wellbeing. It measures the total value of goods and service of processs produced in a state of matter in one single year (Liu,EC 5103 lecture notes,2009).gross domestic product = use of goods and serve + Investment + giving medication Spending + Net export.There atomic number 18 three approaches to calculating GDPExpenditure approach calculates the final spending on goods and services.Product approach calculates the merc flipise value of goods and services.Income approach sums the income received by all producers in the country.Problems with using GDP alone as a measure of economic wellbeing is that by itself, GDP does not throw off any information on income distribution in the country nor takes into draw the resolution of negative externalities on economic growth much(prenominal) as pollution or the effect of positive externalities such(prenominal) as health and education( work Economist, n.d).Taxes and involution judge influence GDP over cadence. Non economic factors influencing GDP include war, drought, natural and man made disasters.Figure 1. Australia GDP growth put- Period 2006-2010 reservoirhttp//www.tradingeconomics.com/political economy/GDPGrowth.aspx? attribute=AUDixzz0i0dpV4ucConf_2009.htmConsumer Price IndexThe best price index measure is the Consumer Price Index (CPI). CPI is used to calculate the inflation roam and is in any case a measure of the change in cost o f living over sentence.Business steering wheelFluctuations in economic activity over a period of time are reflected in the business cycle.Figure 2 Business bending Different stages of economy over a period of timeSource http//www.thebluecollarinvestor.com/blog/wpcontent/uploads/2008/11/business-cycle-graph-better.jpgThe growth rate of Real Gross Domestic Product is used for measuring the fluctuations in the business cycle.Economists argue that higher(prenominal) occupy rates can motivate the households for savings, and supply more loanable bullion in the market, in form of bank deposits. Increased savings results in reducing foreign dependence which in turn accelerates economic growth due to higher investments. McKinnon (1973) and Shaw (1973) cited in Shrestha, M. B., Chowdhury, K. 2005, further assert that higher existent please rate in addition helps channel the capital to the nigh cost-effective industries and help development and technological advancement leading to economic growth.The aforementioned(prenominal) reiterates the fact that both pecuniary and monetary policies are used to glint out the business cycle.Commodity Prices and contendOne of the winder contributors to Australias economic condition is the inter internal economic activities in crabby the commodity prices which is reflected in the Terms of sight i.e. ratio of exports to imports prices (White, 1994). Since Australias export of commodities is large and the import is comparatively stable, the world economy trades more with Australia hence strong Term of trading is one of the key reasons for an extend in standard of living in Australia. The recent rise in global commodity prices due to add-on demand in China and a drop in the price of imports mainly from China has allowed Australia to achieve a higher Term of Trade above its average.In 2005 Australia entered into an agreement with the US on Free Trade (Australian US free Trade Agreement- AUSFTA). Other countries that eat FTA with Australia include tender Zealand, Singapore, China, Japan, Malaysia and South Korea (Travel Document System, n.d).Farm takingsFarm output in addition appears to be a key de circumstanceinant of the economic activity of Australia. This is influenced by factors such as drought. For instance, the major drought of 1980s was one of the key contributors to the disparities between the growth in the Organisation for Economic Co-operation and Development (OECD) countries and Australia (White, 1994).Government spendingGovernment spending in infrastructure such as water, transport, telecommunication, education and health are aimed to expand Australias supply capacity such as plans to improve irrigation infrastructure and buy back unused water allocation a foresightful the Murray-Darling river.Environment climate changeClimate change must also be mentioned in this context. A report licenced by the former Howard government recommended a domestic carbon expelling scheme emphasi zing that Australia should arrive at an active role in developing a global carbon emissions trading scheme. The Rudd government aims to expose a carbon trading system by 2011 and reduce emissions by 5% by 2020 (from 2000 levels).Interest RatesInterest rate is delimitate as the percentage rate per annum that a borrower comprises to the lender or the bills rate which is the rate charged on overnight loans between the pecuniary intermediaries. Interest rate has a negative effect on the silver demand as shown below.Australia is a price-taker in global capital markets, so the Australian interest rates move with the global financial market trends. Interest rates are generally higher in Australia and new-sprung(prenominal) Zealand compared to the international standards largely due to strong financial policies relative to opposite developed countries (Kirchner, 2007, p. 11-15).In Australia, the Reserve swan (RBA) determines the interest rate. It does so by changing the amount of money supplied, in other words by altering the equilibrium quantity of money supplied and money demanded. Australias interest rate is currently at 4.0 percent according to the data published by the Trading Economics in March 2010.Table 1. As at 31.03.2010, Australia has the highest interest rate amongst developed countries.The Reserve Bank of Australia4%Bank of Canada0.25%Bank of England0.5%Bank of Japan0.1%European Central Bank1%Federal Reserve0.25%Swiss National Bank0.25%Source http//www.fxstreet.com/ of import/interest-rates-table/Figure 3. A graphical demonstration of the effect of change in money supply on the interest rate.SourceSource (Liu, EC 5103 supplementary notes, 2009)Figure 4. Australias Interest Rate- Period 2000-2010Source http//www.tradingeconomics.com/Economics/Unemploymentrate.aspx? symbolization=AUDixzz0i0ejiErmUnemployment rateUnemployment rate refers to the % labour force that are unemployed and actively pursuing a job. The unemployment rate is negatively re lated to the real GDP i.e. falling GDP results in an increase in unemployment and vice versa. As at January 2010 based on data published by Trading Economics the unemployment rate is 5.30 percent.Figure 5. Australia unemployment rateSourcehttp//www.tradingeconomics.com/Economics/Unemploymentrate.aspx? image=AUDixzz0i0ejiErm fanfare rateInflation rate refers to the % rate of increase in the average level of prices measured against a standard level of purchasing in the economy. According to the latest figures published by the Trading Economics the Inflation rate was 2.10 percent in declination 2009. Inflation rate is best reflected in the CPI or the GDP deflator.Figure 6. Australia Inflation rate based on CPI- Period 2008-2010Source http//www.tradingeconomics.com/Economics/InflationCPI.aspx?Symbol=AUDixzz0i0eRh6VHConsumer creditOne of the major contributing factors that led to the recent orbicular Financial Crisis was the lack of regulation with relation to consumer credit originat ing in the get together States. Money for institutions to borrow and lend was easily accessible which eventuated in sub-prime mortgages and what has come to be known as NINJA loans (No Income No Job or Assets). This virulent debt was then sold globally by various hedge funds. Although affected by the rest of the world finished the freezing of credit markets, Australia has managed to go on in relatively stable position in compare to the rest of the major economies. This, in part, can be attributed to the regulations enforced by the Consumer Credit Code ( auxiliary 1). Constant reviews and amendments of macroeconomic policy in relation to consumer credit regulation have contributed to Australias robust financial system in comparison to the majority of other developed nations1.Gold and Foreign Currency militiaThe Reserve bank of Australia (RBA) has the responsibility of owning and managing the foreign currency and reserves for Australia2. On average, countries hold 10 per cent of their reserves in gold, although the proportion varies astray from one country to another. The Reserve Bank of Australia holds just 80 tones of gold, or 6 per cent of its total foreign reserves. The bank sold wad its gold holdings in 1997 and its reserves are now largely held in US Treasuries and other government bonds. The reserves are used, when required, to keep the Australian dollar steady in times of volatility. (Bourlioufas,N. 2008).Several reasons exist for the decrease in gold holdings for Australia such asLack of income that it producesThe cost of terminus/securityInability to put value behind the Australian Dollar.Appendix 2 displays the RBAs current reserve holdings for 2009/2010. The amounts are dis vie in Australian dollars and are subject to movement based on current exchange rates.tax income (GST)One of the many aspects in taxation is the Goods and service Tax (GST), which is a value added tax on the supply of goods and services in Australia. Until the innova tion of the GST, Australia operated a Wholesale Sales Tax (WST), which imposed a tax on wholesale of goods. The GST was introduced to bridge the unfair tax gaps between service based businesses and suppliers of goods (GST Australia, 2009). In Australia the GST is levied at a flat 10%, which is put in from the buyer, which shifts the demand curve overcomeward by the size of the tax, which effectively manner both buyers and sellers share the burden of the tax (Mankiw, 2008).National income and outputMeasures of national income and output are used as an estimate of total economic activity by including Gross domestic profit, gross national product, and net national income. Each of these aspects is in relation with the total amount of goods and services indoors a country. The National income and output values are of grandness for a variety of users such as the Reserve bank, academics, and private as well as the Australian government to allow the government to make interventions into the economy based off current and accurate information, as well. (Australia position of Statistics, 2008)Macroeconomic Policies in AustraliaThe goals of economic policy makers areMaintaining real GDP growth constant and positiveMaintaining unemployment rate lowMinimising inflationThe most important contributor to the economic growth is aggregate demand (effecting GDP). Both monetary and fiscal policies effect aggregate demand. How is this game being played? Should RBA consider a looser fiscal policy when determining interest rates? Or should the government consider the possibility of a rate cut off when deciding on fiscal stimulus?Aggregate Demand (AD= C+I+G+NX) is effected by factors such as detonating device investment dilateRise/fall of exchange rateConsumer expand in a country that Australia has trade agreement withA boom in housing marketA share price sort outUnexpected cut/rise in interest rate fiscal policy monetary Policy through the effect of the exchange rate influenc es the economy. Exchange rates also influence the inflation which in turn affects the trade (export and import).Exchange rates are influenced by factors such as commodity prices and interest rates. This reiterates how the determinants of macroeconomics are intertwined.Monetary policy is set by the Reserve Bank of Australia (RBA) to influence the supply (availability) of money and credit within the economy in an effort to nominate growth and stabilise the financial system. Monetary policy influences the interest rates through purchasing and interchange of government bonds.When RBA purchases government bonds to increase runniness, it results a lower interest rate and lower unemployment. During the periods of high inflation, RBA sells government bonds resulting in an increase in interest rates. Effects of monetary policies areIn goldbrick(p) term, a secretive monetary policy results in a decrease in the prices of Goods and Services as well as higher disposable incomes hence an in crease in the households demands.In long term, household demands decrease due to decreased income and increased unemployment.Reserve Bank Act 1959 establishes the objectives of the monetary policies3.Fiscal PolicyFiscal policy targets both consumption and capital spending. It influences economic activities through government budget. The budget is announced yearly in may stating the government Revenue (T) and Expenditure (G). By varying the amount of spending, a fiscal policy may achieve one of the followingFiscal surplus- when GFiscal deficit- when TBalanced budget- when T=GWhen government wishes to stimulate economic growth, it applies an expansionary fiscal policy through increase in government spending and tax cuts which in turn increase consumption and investment. On the contrary, if government decides to slow down the economy, it applies a contractionary fiscal policy. orbicular Financial Crisis and Australias ResponseDeteriorating housing market in the US was the trigger to the fire of GFC in the world. Banks tightened lending policies credit became more expensive and this led to a restrained aggregate demand resulting in washyness in world economic activity.The policies of governments around the world in response to GFC were aimed to address these weaknesses. Since the onset of GFC in 2007 Australia has responded by conducting monetary and fiscal policies. Both Short term and long term implications of these policies have to be considered to determine their effectiveness psychoanalysis of Australias Monetary Policy in response to GFCDuring the GFC, expansionary monetary policies were implemented in Australia in response to the contraction in aggregate demand. RBA increased liquidity through multiple purchases of government bonds resulting in a decrease in interest rate through shifting the LM curve down and IS curve left.Figure 7. Shifts in LM and IS curve reflecting on the interest rateSource http//www.rba.gov.au/econ-compet/2009/pdf/second-prize.pd fThe lower interest rate led to a decrease in cost of borrowing which resulted in lower bonus for saving and ultimately led to an increase in consumption which resulted in the aggregate demand curve to shift to the right (figure 8).Figure 8. Expansionary Monetary Policy and its effect on Aggregate DemandSource http//www.wcc.hawaii.edu/facstaff/briggsp/Macroeconomics/Chap_34_MonetaryFiscal.pdf analysis of Australias Fiscal Policy in response to GFCThe $42 billion economic stimulus plan of Rudd government between December 2008 and February 2009was intend to stimulate aggregate demand (Treasury, 2009). The focus of this packet was mostly on investment in infrastructure which was predicted to have a larger effect on the economy in long run than in short run (Australian Government, 2010). It also provided incentives to housing as well as money bonuses to stimulate consumption in short run.The inherent weakness of such cash bonuses is where mint save their bonuses instead of spending i t. Figures published by ABS demonstrate that immediately later the stimulus payments were made, there was a gigantic hit on spending by Australians households but this slowed down after 3 months (Insider retailing, 2010).According to the latest figures published by Trading Economics on 03.03.2010 and ABS, Australias economy grew at the fastest pace in the last quarter in almost 2 years. Table 2 demonstrates whatsoever of these figures published in this report.Table2 Australias economic figures March 2010.Percent Increase/ step-down %Comparison PeriodGDP 0.9 last fundamentGrowth 2.7Last YearCurrent Account 19 to $17,459 b at December 2009September 2009Machinery Equipment spending 10.9Last QuarterHouseholds spending1.8Last QuarterUnemployment rate to 5.3Last 11 monthsAustralian Dollar against $US and British25 year high against BritishInterest rate by 0.25Source http//www.tradingeconomics.com/Economics/GDPGrowth.aspx?Symbol=AUDixzz0i0diuCw6 Also http//abs.gov.au/AUSSTATS/emailpro tected/mf/5302.0/Economists believe that the primal reason for Australias Economic slaying is Rudds Government stimulus package as well as increase in export however the widened key out deficit of 19% in December 2009 figures is mainly due to an increase in imports. One of the consequences of this is expected to be a 1.3% decrease in Australias GDP therefore the recovery period is going to be weak (Market watch, 2010).Figure 9.Effect of fiscal stimulus on real GDP (forecasts from May 2009 Budget)Source http//www.treasury.gov.au/documents/1686/HTML/docshell.asp?URL=Australian_Business_Economists_Annual_Forecasting_Conf_2009.htmThe unemployment rate has dropped by 5.3% and the number of people employed has increased by 52700. This will put more blackjack on RBA to increase interest (The Australian, n.d).Figure10. Effect of fiscal stimulus on the unemployment rate (forecasts from May 2009 Budget)Sourcehttp//www.treasury.gov.au/documents/1686/HTML/docshell.asp?URL=Australian_Busines s_Economists_Annual_ForecastingTreasury secretaire Ken Henry warns of the adverse shocks to financial markets despite the fact that GFC seems to have passed. Further more he explains that fiscal circumstances improve as the economy strengthens. As the economy strengthens, other things being equal, there is increase upward pressure on prices and monetary responses to that (The Australian, n.d).In his book The enceinte Crash of 2008, the economic advisor Ross Garnaut, warns Kevin Rudd of hard times beforehand in terms of lower living standards and economic wellbeing as a result of stimulus response to GFC (The Australian, October2009). Garnauts point of view is also shared by many other economists who consider the stimulus package a dangerous revival of a discredited Keynesianism which focuses on the short term aggregate spending as the source of growth in the economy. Some point out that fiscal policies result in an interest rate rise which has a crowding out effect on the expans ion due to export and import. Hence they argue the ineffectuality of Australias fiscal policy. The supporters of Stimulus package on the other hand argue that the spending avoided further economic contraction at the right time boosting consumers and businesss dominance and hence avoiding a recession. They also argue back with regards to trade get by pointed above, in the sense that Australias trade share is 47% of GDP which is little than the 60% quoted in previous studies as a benchmark of ineffectiveness of fiscal stimulus. They therefore argue that because of the lower trade share the fiscal stimulus has been effective in Australia (The Australian, n.d).Irving Fischer, the renowned American economist contributed to the economics in many trends one of which is his theory of Inter-Temporal Choice, which describes that through time savings, interest rates and investments are related(The Australian, n.d.). His theory highlights that present economic decisions have to have the p rox in mind4.DiscussionThere has been change magnitude concern amongst the economists in Australia about the sustainability of the fiscal policy in particular with regards to a solution for the current government deficit of $17.459 billion (Table 1).Australia has had ambitious times in maintaining a stable economic condition. The recent Global Financial Crisis (GFC) that started in 2007 imposed great pressure on the economy. save implementation of the fiscal and monetary policies achieved a better than expected performance by the economy (Budget, 2009-10), with forecasts of stronger growth and lower unemployment.Rudds Stimulus package through its fiscal expansionary characteristics seems to have been an appropriate response to the GFC in stabilizing the output levels however there is great concerns regarding the future of the economy.Did our politicians throw in a Keynesian based fiscal stimulus package without consideration of future consequences of it? Was there any vote buying elements incorporated in the invention of it?There is a general consensus amongst the economists on the effectiveness of lowering interest rates as a monetary response to GFC by RBA which was also assisted by a depreciated exchange rate.On the other hand the fiscal policy has generated a lot of debate amongst the economists with no consensus on its effectiveness in sight. This is mainly due to the long lasting effect of the fiscal stimulus as oppose to short term, temporary and more reversible effect of the monetary stimulus.Kevin Rudds Fiscal stimulation concentrated on aggregate spending in short term to boost economic growth as per the Keynesian model. This has been proven to be the case in Australia however the unproductiveness of this large scale spending and the deficit resulting from it is far from a perfect economic condition.Does Kevin Rudd share the thought with John Maynard Keynes of in the long run we are all dead? If so are we, the Australian people supposed to suffer the consequences of his 17 billion dollars debt through our taxes, higher interest rates and higher inflation? If Irving Fisher was existent and if he was with Kevin Rudd when he was signing on the stimulus package, perhaps he would have reminded the prime minister that although his short term fiscal stimulus policy would increase public spending, it would show no regards to achieving long term high standard of living for Australian people. The side set up of the fiscal cash out includeIncreasing future taxes to pay for the debtsHigher interestLikelihood of inflation (as history shows us that the easiest way out of public debt has traditionally involved money creation).So was Kevin Rudds outsize night out worth the next days hangover of a budget deficit that adds to public debts which would further drain the economy? Or has the government designed an appropriate fiscal rebalancing strategy that it hasnt shared with Australian public yet?