Real GDP Growth and Inflation Rate in Australia

Discuss about the Population and Persistently Low Interest Rates.

Through exporting mining, manufacturing, banking and telecommunications, Australia has increased its national income and consecutively has become a wealthy nation. This market economy in turn has helped the country to reduce its poverty level (McFarlane, Blackwell and Mounter 2018). Along with mixed economic structure, the United States of America (U.S.A) has also possessed natural resources with large amount and also has capacity of higher productivity (Švarc and Dabi? 2017). Hence, this economy has become one of the growing economies by capturing significant market share in international market. Consequently, the U.S dollar has become the primary reserve currency, all over the world. Therefore, analysing these two countries in the light of macroeconomic concepts can be beneficial. Thus, this report has intended to analyse various economic indicators like real GDP growth, unemployment rate, exchange rates, consumer price index (CPI) along with exports and imports of these two countries. Moreover, this report is going to discuss cash rate of Australia and rates of the Federal Reserve Fund in the U.S.A as well. To analyse those concepts, this report has collected statistical data of those macroeconomical factors for both countries from 1990 to 2015-16.  After doing this, the specified report has intended to analyse various relationships between Australia and the U.S.A based on those macroeconomical factors. The chief motive for discussing those factors is to understand the present economic situation of Australia through analysing business cycle with the help of various graphs, summary statistics and analysis along with discussion. This discussion further helps this report to provide prediction about the macroeconomic outlook of this country.

With the help of Real Gross Domestic Product (GDP), a country can measure its value of economic goods and services for a particular time. The value of this inflation or deflation adjusted national income is measured with the help of a base year’s price level, which is called constant price (Feldstein 2017). Hence, this real GDP growth rate represents economic growth rate of any country. On the other side, inflation rate represents the rate at which general price levels regarding its goods and services of a country, increases (Holston, Laubach and Williams 2017). In this context, it is essential to mention that inflation rate and purchasing power parity (PPP) has a negative relationship, which means higher level of inflation rate tends the PPP of a country to decrease further.

Relationship between Australia’s Real GDP Growth Rate and Unemployment Rate

The following figure has represented real GDP growth rate if Australia at a constant price level.  In addition to this, inflation rate of this country has also represented in the other figure. With the help of these two figures, relationship between real GDP growth rate and inflation rates can be described.

Represented real GDP growth trend of Australia from 1990 to 2016. According to this figure, this trend has increased sharply since 1992, which in turn has implied that this country has experienced a healthy economic condition (Data.worldbank.org 2018). In other words, this trend has indicated that national output or national expenditure of Australia has increased sharply. 

The share of jobless people in terms of percentage of a country’s total workforce is defined as the unemployment rate (Cairo and Cajner 2018). Based on the Okun’s law, increasing economic growth rate implies decreasing rate of unemployment while the opposite situation can also be occurred. Hence, if a country’s potential GDP growth rate is 2%, then to reduce the unemployment rate by 1%, this GDP needs to increase by 4% (Soylu, Çakmak and Okur 2018). With two diagrams of real GDP growth rate and unemployment rate, a relation can be drawn between these two factors.

The real GDP growth rate of Australia is drawn in the above figure while the unemployment rate of this country is shown in the following figure. With the help of these two diagrams, a relation between these macroeconomical factors can be derived.

Represented that the unemployment rate of Australia has decreased over the years. This condition has supported the Okun’s law through showing an opposite relationship between unemployment rate and the real GDP growth rate of Australia (Tradingeconomics.com, 2018). Due to improving economic condition of this country, people have started to demand more outputs with their higher incomes and consequently, firms have also tended to hire more workers, which in turn has reduced unemployment rate.

The concept “business cycle” represents economic-wide fluctuations regarding production, general economic activity and trade. Based on conceptual perspective, the business cycle can be referred as the period of contractions and expansions of economic activities around a long-term growth trend (López-Salido, Stein and Zakrajšek 2017). The four phases of a business cycle are expansion, peak, contraction and trough. This situation can be referred as expansionary phase, where aggregate demand and employment level increase further.

The term “net export” of a country measures the difference between total export and total import while real exchange rate measures the ratio of foreign country’s price level with the one of domestic country where both currencies are represented in the form of domestic currency for calculation. Net export and real exchange rate has an important relationship with each other. For instance, a higher real exchange rate tends the net export of a country to decrease further while for lower exchange rate, the opposite situation occurs (Madani and Van Vyve 2017). The chief reason behind this phenomenon is that, higher level of real exchange rate makes a country’s exports costly and imports cheaper. Hence, at this situation, exports of a country decrease while imports increases further and consequently the value of net export falls. On the other side, decreasing exchange rate indicates decreasing prices for domestic goods, which in turn leads the exports of the country to increase further (Juselius, Reshid and Tarp 2017). However, at this situation, imports become costly and consequently net exports increases. This relationship can be analysed between Australia and U.S.A.

Business Cycle

With the help of following two figures, a relationship between net exports and the real exchange rate of the U.S.A and Australia can be established. The following figure has represented the amount of the U.S.D that can be obtained for one unit of Australian dollar.

According to figure 4, the amount of U.S.D has fluctuated over time for one unit of Australian dollar. Moreover, within 2000 and 2002, this rate has decreased significantly and after that, it has started to increase again. This means, for one unit of AUD, 0.8 USD can be obtained in 1990 while this amount has become 1.1 in 2012 (Fred.stlouisfed.org, 2018). Hence, initially, imports of Australia have become cheaper from the U.S.A while after 2010; exports have become cheap for Australia with the U.S.A though after thus year, it may start to decrease and based on real exchange rate of 2016, the net export of this country can decrease significantly.

The above diagram has represented total export and total import of Australia since 1990 and consequently, the difference between total exports and total imports have presented the value of net export of this country. As, the U.S.A is one of the largest trading partner of the U.S.A, fluctuation of real exchange rate between these two countries have affected the net export of Australia, significantly (Data.worldbank.org, 2018). Hence, initially exports of Australia have remained low in 1990 while after 2009, this amount of total export has increased.

Therefore, with the help of figure 4 and figure 5, it can be said that net export of Australia with the U.S.A has increased significantly after 2002. However, in 2016, it has obtained a negative value.

In Australia, cash rate refers as the bank rate. This rate is charged by the Reserve Bank of Australia (RBA) for overnight loans to commercial banks. Based on this official cash rates (OCR), the RBA can adjust its interest rates, which is applicable for each country’s economy. Moreover, any transaction between financial institutions of the country cannot change this OCR, as it does not affect the country’s money supply. However, this cash rate can be affected through any transactions between the RBA and any financial institutions (Wilkins, Gardner and Chapman 2016). On the contrary, Federal Reserve Funds rates implies the interest rate based on which banks and other unions of credit can lend their reserve balances to other financial institutions for depositing overnight, without taking collateral. Reserve balances mean the amounts, which the Federal Reserve keeps for maintaining reserve requirements of depository institutions of a country (Carpenter, Demiralp, Ihrig and Klee 2015). Therefore, as a vital benchmark for financial market of a country, the federal fund rate is important.

Relationship between USA and Australia’s Net Exports and the Real Exchange Rates

The above figure has represented the Federal funds rate of the U.S.A since 1990. According to this figure, the rate has fluctuated between 1990 and 2008 and after this year, the rate has remained low at 0.5% due to financial crisis (Bruno and Shin 2015).

Figure 7 has represented the cash rate of Australia and this rate has decreased since 1990. This rate has remained almost same at 5% up to 2008 (Reserve Bank of Australia, 2018). However, after this year, the rate has started to decrease below this percentage. In this context, it can be mentioned that the trend of these two rates are almost same. The chief reason behind this similar outcome can be described as follows.

In world economy, the U.S.A has captured a significant market share with its strong and large economic position. Consequently, the economic condition of the U.S.A can also influence the economic condition of other countries. Thus, this rate has also affected the Australian economy and this in turn has adversely affected investors of Australia as well. Therefore, for protecting economic condition of Australia, the government of this country has decreased the cash rate since 1990. Moreover, this trend has remained at a stable position between 2000 and 2012 (Elmendorf and Sheiner 2017). However, during financial crisis in world market, this cash rate has decreased further.

However, some economists have not considered this concept. According to them, the U.S.A has not affected Australia in a direct and immediate way. This can be explained with the concept of business cycle. After 1990s, Australia’s economic cycle and U.S.A’s economic business cycle has remained different. In addition to this, the relation between these two countries, based on trade, has also changed after this year. The Reserve bank of Australia has managed the country’s economic condition during financial crisis through decreasing the interest rate. However, the bank has taken this decision after some years of financial crisis. Through taking this decision, Australia’s economic condition has remained at a stronger position during this financial crisis, compare to other developed countries like the U.S.A.

In this context, it can also be mentioned that the decreasing interest rate of U.S.A has also affected Australia after some times. As most of the Australian banks take loans from the U.S.A’s banks for performing their business activities, increasing rate of the federal funds has led the cost of borrowing of Australian banks to increase further. As a result, this phenomenon has affected customers of Australia as they have borrowed from this country. However, commercial banks can increase their interest rate independently while the RBA remains its interest rates same after the Federal funds rate changes. This can happen to overcome the profit levels of those banks. However, the opposite outcomes can also be obtained when the Fed increases its interest rates. Increasing interest rate implies a strong economic market for the U.S.A. As a result, the country can perform its various economic activities like investment and trade through large amount compare to before. In addition to this, the U.S.A can increase imports from foreign market as well. This in turn has helped Australia to increase its trade relation further. Moreover, Australia has also obtained financial assistance by large amount from the U.S.A for developing its economical and financial conditions significantly.

Through analysing various macroeconomical factors and some relationships within them, it is observed that a phase of business cycle has performed over here. The real gross domestic product has increased steadily since 1990 while the unemployment rate and inflation rate have decreased gradually over the year (Holston, K., Laubach and Williams 2017). This phase is similar with the phase of prosperity. Moreover, real exchange rate between the U.S.A and the Australia has fluctuated and consequently net export of Australia has started to increase after 2002 and after 2012, this value has reached at its higher level. Hence, increasing export has helped Australia to develop its economic condition (Krugman 2017). On the other side, the Federal Fund rate Hs fluctuated drastically since 1990 and the financial crisis of 2008, this rate has remained low and stable at 0.5%. This rate indirectly has influenced the cash rate of the Reserve Bank of Australia and as a result, this official rate has also decreased further. In this context, it can be mentioned that this lower rate has helped Australia a better and strong economic position during financial crisis, while other developed countries have experienced economic losses. Hence, from those analyses, it can be stated that the economic condition of Australia has remained at a better position with healthy economic condition. Hence, with the help of entire discussion, it can be said that the country is at expansionary period though it is going to experience recessionary period in coming years.

Conclusion:

The entire discussion stated above is concluded over here. This report has discussed on some chief macroeconomic indicators like real GDP growth, consumer price index (CPI), unemployment rate along with exports and imports and so on. With the help of those indictors, this report has tried to find relationship between real GDP growth rate and inflation rate of Australia and also has analysed relationship between real GDP of this country with its unemployment rate. These two relationships have represented an expansionary period of Australia. The report has also analysed net export of Australia with the help of total exports and total imports of this country and also has analysed the impact of trade between Australia and the U.S.A with the help of real exchange rate between these two countries. Based on data from 1990 to 2016, it is seen that this trend has fluctuated over the year and consequently net export has obtained positive value and negative value as well. Moreover, the report has also stated that Federal Fund rate of the U.S.A has indirectly influenced the Cash rate of Australia and the country has remained stable during global financial crisis.

References:

Bruno, V. and Shin, H.S., 2015. Capital flows and the risk-taking channel of monetary policy. Journal of Monetary Economics, 71, pp.119-1

Cairo, I. and Cajner, T., 2018. Human Capital and Unemployment Dynamics: Why more educated workers enjoy greater employment stability. The Economic Journal, 128(609), pp.652-682.

Carpenter, S., Demiralp, S., Ihrig, J. and Klee, E., 2015. Analyzing Federal Reserve asset purchases: From whom does the Fed buy?. Journal of Banking & Finance, 52, pp.230-244.

Data.worldbank.org. 2018. GDP (constant 2010 US$) | Data. [online] Available at: https://data.worldbank.org/indicator/NY.GDP.MKTP.KD?end=2016&locations=AU&start=1990 [Accessed 14 May 2018].

Data.worldbank.org. 2018. Inflation, consumer prices (annual %) | Data. [online] Available at: https://data.worldbank.org/indicator/FP.CPI.TOTL.ZG?end=2016&locations=AU&start=1990 [Accessed 14 May 2018].

Elmendorf, D.W. and Sheiner, L.M., 2017. Federal Budget Policy with an Aging Population and Persistently Low Interest Rates. Journal of Economic Perspectives, 31(3), pp.175-94.

Feldstein, M., 2017. Underestimating the real growth of GDP, personal income, and productivity. Journal of Economic Perspectives, 31(2), pp.145-64.

Fred.stlouisfed.org. (2018). Effective Federal Funds Rate. [online] Available at: https://fred.stlouisfed.org/series/FEDFUNDS [Accessed 16 May 2018].

Fred.stlouisfed.org. (2018). U.S. / Australia Foreign Exchange Rate. [online] Available at: https://fred.stlouisfed.org/series/AEXUSAL [Accessed 16 May 2018].

Holston, K., Laubach, T. and Williams, J.C., 2017. Measuring the natural rate of interest: International trends and determinants. Journal of International Economics, 108, pp.S59-S75.

Holston, K., Laubach, T. and Williams, J.C., 2017. Measuring the natural rate of interest: International trends and determinants. Journal of International Economics, 108, pp.S59-S75.

Juselius, K., Reshid, A. and Tarp, F., 2017. The real exchange rate, foreign aid and macroeconomic transmission mechanisms in Tanzania and Ghana. The Journal of Development Studies, 53(7), pp.1075-1103.

Krugman, P., 2017. Crises: The price of globalisation?. In Economics of Globalisation (pp. 31-50). Routledge.

López-Salido, D., Stein, J.C. and Zakrajšek, E., 2017. Credit-market sentiment and the business cycle. The Quarterly Journal of Economics, 132(3), pp.1373-1426.

Madani, M. and Van Vyve, M., 2017. A MIP framework for non-convex uniform price day-ahead electricity auctions. EURO Journal on Computational Optimization, 5(1-2), pp.263-284.

McFarlane, J., Blackwell, B. and Mounter, S., 2018. Good Gardening for a Perennial Economy: What’s the Optimal Growth Path for a Regional Economy?. The Journal of Developing Areas, 52(1), pp.29-44.

Reserve Bank of Australia. 2018. Cash Rate | RBA. [online] Available at: https://www.rba.gov.au/statistics/cash-rate/ [Accessed 16 May. 2018].

Soylu, Ö.B., Çakmak, ?. and Okur, F., 2018. Economic growth and unemployment issue: Panel data analysis in Eastern European Countries. Journal of International Studies Vol, 11(1).

Švarc, J. and Dabi?, M., 2017. Evolution of the Knowledge Economy: a Historical Perspective with an Application to the Case of Europe. Journal of the Knowledge Economy, 8(1), pp.159-176.

Tradingeconomics.com. (2018). Australia Exports | 1971-2018 | Data | Chart | Calendar | Forecast | News. [online] Available at: https://tradingeconomics.com/australia/exports [Accessed 16 May 2018].

Tradingeconomics.com. (2018). Australia Unemployment Rate | 1978-2018 | Data | Chart | Calendar. [online] Available at: https://tradingeconomics.com/australia/unemployment-rate [Accessed 15 May 2018].

Wilkins, K., Gardner, G. and Chapman, B., 2016. Developments in Banks’ Funding Costs and Lending Rates. RBA Bulletin, pp.21-30.