Applied Economics Essay

Questions:

Using data from the Australian Bureau of Statistics (ABS) examine the contribution of all the various components of aggregate expenditure to recent performance in the Australian economy. Given this information, consider where the economy may currently be in the business cycle and present your analysis using aggregate demand and aggregate supply. Briefly consider the policy implications of this position.

Assessment tasks:

  • Demonstrate understanding of theory.
  • Ability to utilise data.
  • Examine contributions to GDP growth (NOT simply contributions to GDP).
  • Present findings in terms of macroeconomic equilibrium and consider policy implications of this position.

Answers:

Introduction

In Australia, the Gross Domestic product that is GDP is the overall value of the commodities and services which is produced within Australia in a specified time period. It does not allow for the depreciation of the equipment. This is the reason it is known as the Gross Domestic product (Konchitchki & Patatoukas, 2014).

The aggregate expenditure is the sum of the expenditure commenced in the financial system by the factors during a precise period. The total amounts of firms as well the domestic policy are determined by the aggregate expenditure. The method is used in calculating the total sum of the financial action. It is the present value of the completed products and services in the financial system. The total aggregate expenditure comprises of consumption, investment, net exports as well as the spending of the government (Barrett et al., 2013).

Understanding of the theory

The various components of aggregate demand include net exports, consumption, investment, government expenditure. The aggregate expenditure is that method which helps in calculating the overall sum of the financial activities in the economy. As compared to the GDP, it is an important factor as it helps in measuring the development of the financial system (Bierbrauer, 2014).

The above graph shows the model of aggregate expenditure. It helps in determining the graph with the help of real GDP, potential GDP as well as the point of equilibrium. The GDP is impacted with the shift in either demand or supply.

Over the course of the year 2014-2015, the exports and exporters of Australia have had handled with three most important headwinds. Firstly, there was an additional decline in the growth rate of the economy in the export market of Australia. Secondly, the trade growth of the world has continued to be unsuccessful in order to gain any vital impetus over the past year.

Figure 1: The Total export in Australia

(Source: www.abs.gov.au, 2016)

Figure 1 shows that the decline in the total export share imitated a fall of almost four percent in the cost of total exports of commodities and services in the year 2014-2015. It was down to $318.7 billion as compared to that of $331.2 billion in the year 2013-2014. By the sort of export, that $12.5 billion reduced mainly reflected an even higher fall in the price of exports of minerals and fuels that was only partly counterbalance by enlarge in the cost of exports of services and food as well as produces. In terms of the rate of growth to a certain extent than total values, at the same time as exports of minerals and fuels exports cut down by almost 14 per cent over the preceding year, exports of services and of foodstuff both increased by approximately nine per cent (Moore et al., 2015).

Table 1 is constructed to show the export rate in Australia which has been rising over the past few years.

Year

Export

2006

16000

2008

18000

2010

20000

2012

22000

2014

24000

Table 1: The Export in Australia from the year 2006-2014

The dissimilarity in the performance of both exports of commodities and exports of services was reasonably bleak. However, in the case of the export of goods the story was completely dominated by resources, where a noteworthy rise in the volume of export was not enough to recompense for an even sharper decline in prices (Young et al., 2016).

It is from the private investment in Australia that the strongest constructive contribution came from. It contributed almost 0.7 percent in the economy of Australia. This is a main turnaround on the previous three quarters where the payment of private capital configuration has been diminishing. The consequence in the March quarter is in row with the ABS came across investment data. As the fiscal incentive unwinds, public investment is a contractionary force. In Australia, the contribution of investment to the real growth in the year 2015 was negative. However, in the year 2010 it was almost 2 percent (Butlin, 2013).

The investment in Australia is published by the ABS. It can be seen from the above diagram that between the year 2010 and the year 2014, there was a noteworthy inflow of Foreign Direct Investment into Australia in mining and excavation and real estate. The foreign investment in Australia is mostly commenced in the form of folder investment (Bath, 2012).

The private investment was the strongest contributor to growth in the year 2015. The countries, which witness a high level of investment in the factories, machinery, mines and new plants generally, have a high economic growth. In Australia, the private investment had been partially financed by the inflow of capital from foreign countries as well as from domestic sources.

Year

Investment

2006

25000

2008

30000

2010

40000

2012

45000

2014

50000

Table 2: The Investment rate in Australia from the year 2006-2014

The government has an exclusive role in reallocating resources in the financial system due to their capability to forcibly obtain resources via taxation and guideline. The government can also spend on existing consumption or spend in future consumption. They can expend in either ways that develop aggregate financial supply or decrease it demand or not. The government absolute consumption expenditure increased by 0.7 percent for the quarter, leaving a yearly expansion at 3.6 percent.

Year

Government Spending

2006

36

2008

35.5

2010

35

2012

34.5

2014

34

Table 3: The Government Spending in Australia from the year 2006-2014

In Australia, the rate of unemployment has increased considerably over the past few years to a high level. However, the growth over the financial year is likely to remain below trend. There are positive signs of the growth in some parts of the non-mining financial system in Australia.

The business cycles are the kind of variation that is found taken together financial activity of the nations that systematize the work mostly in the enterprise of the trade. A cycle comprises of development occurring at the identical time in numerous financial activities followed by comparable common recessions, reduction and revivals, which unite into the development phase of the next cycle.

At this point, Australia is in the recovery phase of business cycle. It is characterized by an increase in the confidence of the consumer in the market. At this point of business cycle, the lending rates of the banks are low and the companies are able to afford in order to finance the projects. This in turn leads to an increase in the productivity, which is mainly due to the augmented aggregate demand in the financial system of Australia. The rise in the production allows the industries to start hiring. This in turn leads to an increase in the income of the consumers. The consumers are now able to purchase the capital commodities. At this period, the profit margins of the companies start to increase. As a result, the GDP that is the gross domestic product also rises.

The recovery phase of the business cycle is usually characterized by a rebound in financial activity with the growing profits. At this time, the increase in borrowing and spending takes place.

The above figure shows that the demand curve shifts from DD to D1D1. This result in the rise in the price, which increases, from P to P1. This deals with the recovery of the recurring recession as well as struggling with the difficulty of structurally regulating the financial system away from a very high dependence on investment led expansion.

Contributions to GDP growth

As per ABS, the strong result was determined by strength in domestic final consumption expenditure beside the communal gross fixed capital structure. Investors generally worry about the negative GDP growth (McLean, 2013).

Figure 2: The GDP growth of Australia

(Source: "Australia GDP | 1960-2016 | Data | Chart | Calendar | Forecast | News", 2016)

The figure 2 shows that in the year 2015, the GDP growth rate of Australia had expanded at around 0.6 percent as compared to the previous year which was around 1.1 percent. It has been reported by the Australian Bureau of Statistics that the net export did not have any contribution to the growth of GDP. However, the final consumption made a positive contribution to the GDP growth. It can be seen from the above diagram that the economy expanded by 3.0 percent. Since the third quarter of 2012, the economy experienced a fastest development (Katz, 2012).

The rate of growth and contribution which is presented in the publication for Australia, are derived from OECD estimates of chained volumes. The OECD aggregates at the level of prices as well as purchasing power parity of GDP are planned by sequence of the total of the national prior year prices sequence (Brackfield, 2014).

The contribution of a constituent to a quarter-on-quarter GDP expansion had been calculated as the rate of real growth of this constituent weighted by the share of this constituent in the GDP for the present prices. Two effects are reflected by the contribution. It includes the velocity with which a constituent changes and the comparative significance of the constituent in total GDP. One should be conscious about the fact that the previous formula applied in this context is strictly not accurate in the circumstance of chained approximation of volume because of the loss of additively. However, it comprises a practical first estimate, easy to understand and is extensively used as such. Because of rounding, the input of constituents may not sum to the GDP growth (Shahiduzzaman & Alam, 2014).

The contribution to net exports has been computed as the sum of input of exports and input of imports. Contribution of variation in ranges has been derived as a remaining and comprises a statistical inconsistency (Dyster & Meredith, 2012).

Macroeconomic Policy Implications

The alternative of exchange rate administration is thought to have a vital implication for both the macroeconomic outcomes and policy. As a result, even after 10 years of a floating Australian currency there is very little difference with the outlook that exchange rates should be determined by market. This is partially due to the fact that considerable fluctuations in the costs of commodities operated by Australia are a main source of exterior shocks to the financial system and a rationally generously floating rate is predicted to offer a degree of insulation from overseas price movements, thereby mitigating terms of trade surprise.

The facility to operate a self-governing macroeconomic policy is vital. The depreciation in Australia led to the issues related to the macroeconomic policy. This in turn includes suitable connection between policies of wages as well as the reduction of currency. The GDP growth in Australia is central to the macroeconomic policy (Weale et al., 2015).

Year

GDP

2006

600

2008

800

2010

1000

2012

1200

2014

1400

Table 4: The GDP in Australia from the year 2006-2014

The three key macroeconomic policies that are pertaining to the exchange rate in Australia are as follows:

  • The policy with respect to the considerable depreciation
  • The current account and the rate of exchange
  • The policy of uncontaminated interference in the overseas exchange markets

In order to consider these orders in detail, it is important to consider the above mentioned points and also examine the setting of the fiscal and the monetary policy. It has been reported by the IMF that if the macroeconomic policies are sustained then they can raise growth (Fagiolo & Roventini, 2012).

The macroeconomic policy helps to increase the rate of employment and the rate of poverty. The macroeconomic policies were steered by a policy in order to encourage expansion, employment and reorganization. It was incorporated to achieve the macroeconomic equilibrium in Australia that is to reduce the budget shortage as well as the fall in the rate of inflation (Subedi, 2016).

The monetary policy is constricted substantially. By convoying these policies, the wage policy was intended at restraining increase in the real wages. The fiscal development was likely to value the nominal as well the real exchange rate (Aghion & Kharroubi, 2013).

The fiscal policy is presently severe rather than just mildly limited. The government of Australia is overseeing the quickest process of the fiscal consolidation. In terms of the Reserve bank the monetary policy is mildly limited.

Conclusion

Contribution of difference in ranges has been derived as a remaining and comprises a statistical inconsistency. The rate of growth and contribution, which is presented in the publication for Australia, are derived from OECD estimates of chained volumes. Enthused by Australian fiscal and financial policy performance during GFC that great financial crisis, this study examines the effects of macroeconomic policy shocks on the labor market dynamics in Australia using a vector auto-regression (VAR) method. The boost in the productivity is mainly due to the augmented aggregate demand in the financial system of Australia. The macroeconomic policy helps to increase the rate of employment and the rate of poverty. The GDP growth in Australia is the innermost to the macroeconomic rule.

References

5206.0 - Australian National Accounts: National Income, Expenditure and Product, Dec 2015. (2016). Abs.gov.au.

Aghion, P., & Kharroubi, E. (2013). Cyclical macroeconomic policy, financial regulation and economic growth.

Australia GDP | 1960-2016 | Data | Chart | Calendar | Forecast | News. (2016). Tradingeconomics.com. Retrieved 31 May 2016,

Barrett, G., Levell, P., & Milligan, K. (2013). A comparison of micro and macro expenditure measures across countries using differing survey methods (No. w19544). National Bureau of Economic Research.

Bath, V. (2012). Foreign investment, the national interest and national security-foreign direct investment in Australia and China. Sydney Law Review, 34(1), 5-34.

Bierbrauer, F. J. (2014). Optimal tax and expenditure policy with aggregate uncertainty. American Economic Journal: Microeconomics, 6(1), 205-257.

Brackfield, D. (2014). OECD Main Economic Indicators. In Encyclopedia of Quality of Life and Well-Being Research (pp. 4468-4471). Springer Netherlands.

Butlin, N. G. (2013). Investment in Australian economic development, 1861-1900. Cambridge University Press.

Dyster, B., & Meredith, D. (2012). Australia in the global economy: continuity and change. Cambridge University Press.

Fagiolo, G., & Roventini, A. (2012). Macroeconomic policy in dsge and agent-based models. Revue de l'OFCE, (5), 67-116.

Katz, R. (2012). The impact of broadband on the economy: Research to date and policy issues. Broadband Series.

Konchitchki, Y., & Patatoukas, P. N. (2014). Accounting earnings and gross domestic product. Journal of Accounting and Economics, 57(1), 76-88.

McLean, I. W. (2013). Why Australia prospered: the shifting sources of economic growth. Princeton University Press.

Moore, S. J., Madin, B., Norman, G., & Perkins, N. R. (2015). Risk factors for mortality in cattle during live export from Australia by sea. Australian veterinary journal, 93(10), 339-348.

Shahiduzzaman, M., & Alam, K. (2014). Information technology and its changing roles to economic growth and productivity in Australia.Telecommunications Policy, 38(2), 125-135.

Subedi, M. N. (2016, March). Effects of macroeconomic policy shock on the labour market dynamics in Australia. In Proceedings of Economics and Finance Conferences (No. 3205612). International Institute of Social and Economic Sciences.

Weale, M., Blake, A., Christodoulakis, N., Meade, J. E., & Vines, D. (2015).Macroeconomic Policy: inflation, wealth and the exchange rate (Vol. 8). Routledge.

Young, R., Cowie, A., & McLeod, R. (2016). Soil carbon and inferred net primary production in high and low intensity grazing systems on the New England Tableland, Eastern Australia. Soil Research.

How to cite this essay: