Evaluation of Macroeconomics Performance of Australia and US
EVALUATION OF MACROECONOMICS PERFORMANCE OF AUSTRALIA & US
1) Data of the macroeconomic indicators
The macroeconomic indicators are as follows:
|GDP (USB $Bn)||Interest rate||Unempl Rate||Exchange rates||CPI||NX|
The GDP growth rates of US and Australia as presented as follows:
|GDP growth Rates %|
As can be seen from the above the GDP growth of US is lower but more consistent than Australia in the long term. Laos US economy is a much bigger economy than the Australian economy as seen by the GDP in US $.
2) Summary statistics
|US GDP||AUS GDP||US Interest rates||AUS Interest rates||US UR||AUS UR||US Exch Rtes||AUS Exch rates||US CPI||AUS CPI||US NX||AUS NX|
GDP growth %
GDP growth %
3) Pair wise graphs
3.1 Real GDP Growth and inflation rates
While the mean GDP growth rate of US is 2.47% , the same is much lower for Australia at 1.49%. Also the Inflation rate is higher ( on an average ) at 2.49% where as the same for US is 2.22% in be tween 1995-2015. So the Inflation rates prevailing in the Australian economy is believed to have negatively affected the long term growth prospects for Australia economy.
3.2 Real GDP Growth and Unemployment rates
The GDP growth rates and the level of unemployment rates are negatively correlated. Hence it can be seen that in the years where the level of unemployment rates are higher , the GDP growth rates are comparatively lower and the same GDP growth has stabilized and reduced the rate of unemployment in both the economies.
3.3 Real GDP Growth and Exchange Rates
The GDP growth in both Australia and US have remained stable in the ast twenty years between 1995-2015 and the same caused the exchange rates to be more favorable to them. As supply of currency increased in US$, the same caused the US$ to depreciate and increase imports (Cortinhas, 2013).
3.4 Real GDP Growth and Real interest Rates
3.5 Exchange Rates and Growth of NX
The Exchange rate of US $ is more consistent as shown in the above diagram than the A$. this is because of the reason that the US $ is more in demand all over the world and is one of the biggest reference currencies. Also the Australian NX is more consistent than US NX (Fernandes, 2014).
a) critical analysis of and discussion of the plausible economic explanation including the role of government policy for salient relationship between real GDP growth and other indicators.
1) GDP growth rate and Interest rates
The US GDP is more consistent in its growth pattern than that of Australia in the period between 1995-2015. The interest rates are expected to rise with increase in the level of economic growth and real GDP growth rates. This means as the GDP rises and economic activity picks up the demand for money as investment picks up and as a result of the same the rates of interest goes up. The same is true for both Australian economy and the US economy. However while rates are expected to increase, the same might be hurtful for the economy. Since the economic boom will coincide with demand for more credit the interest rate shave to be managed carefully and the US Fed and The RBA have to lower the interest rates to make sure enough demand for investment is created to meet the new production needs and if the interest rates are found to be on the higher side then new investments would be hurtful for the economy and economic growth would be reduced. Thus both the Fed and the RBA has managed to lower the interest rates to make sure investment demand picks up especially in the wake of higher AD and higher growth sentiments. Thus, both US and Australian economy are in the expansion phase right now even if the rates of growth are lower (Sheffrin & Sullivan, 2003).
2) GDP growth rate and Net exports
Exports are additions to the country’s GDP where as the imports are subtractions to the country’s GDP. In this regard US economy is historically shown a tendency of showing higher level of imports than its exports barring a few quarters of higher net exports. This means in the last 20-25 years US economy is known to have a negative balance of trade as domestic demand for foreign goods and services have exceeded the foreign demand for its domestic production. As a result of which the net export have resulted in negative balance and subtraction from GDP which effectively lowered the GDP growth of the economy in the same period.
On the other hand the trade balance for the Australian economy is traditionally positive but in recent years particularly after the slowdown in the wake of financial crisis and the worldwide recession, the trade balance suffered as a result of lower mining exports both by volume and value. But gradually the trade balance or the net experts have rebounded for the economy and Australia is primarily enjoyed a positive trade surplus in the last few years which points towards a positive impact of the same on the GDP growth rates. However, the GDP of the Australian economy is not expected to grow too largely ad the country would see moderate growth only in the next 3-5 years. This means there would be expansionary trends in the economy’s major segments and growth would pick if the export prices recover in the next few years (O’Roark, 2014).
3) GDP growth rate and CPI
The CPI measures inflation while the GDP measures economic growth. In general, the GDP growth is positively correlated to the Inflation rates and higher GDP growths would linked with higher inflation rates. If the GDP grows too fast hen the price level would also rise too fast causing people to be unable to keep up with the rising prices and standard of living. As prices would rise higher, the prices won’t be sustainable through less than average increase in purchasing power and aggregate demand would be lower. This would bring down the growth rates and cause possibly recessionary pressure in the long term. As of now both the US and the Australian economy would be capable of sustaining 2.5%-4% GDP growths and larger GDP growths if any would be negative for both the economy’s. Right now, both the economy’s are quite balanced and inflation is lower and GDP growth is lower but stable. Thus, the Australian nd US economy would like to grow in the region of 3-4% or 2.5% to 3.5% in the near future and keep inflation rate less than 1.25% to maintain a stable economic growth and aggregate demand (Michael, 2009.).
4) GDP growth rate and Unemployment rates
There is a direct relationship between the GDP growth of an economy and the unemployment rates and if the rate of unemployment is higher than natural rate of unemployment then the GDP growth would suffer negatively. IN the case of US , the US GDP needs to grow about 3% to maintain a natural rate of employment. But currently the GDP growth is having a mean of 2.47% which is, lower than expected and hence the actual unemployment rate of higher than 5-6% in the last few years. Thus the higher unemployment rates prevailing in the US economy is hurting the prospects of growth of the economy and GDP and to get over the same the policy makers would need to find ways to increase level of employment. Right now US GDP is negatively affected by higher than expected rates of unemployment. For a more balanced growth the same must be brought down to 4% level.
In the case of Australia, the mean rates of unemployment in the last 20 years (1995-2015) is found to be 6.04% and thus the higher unemployment rates prevailing in the AUS economy is hurting the prospects of growth of the economy and GDP and to get over the same the policy makers would need to find ways to increase level of employment. Right now Australian economy is maintaining a GDP growth rate of 2% approx. in the same period and for a more balanced growth the unemployment rate needs to be brought down to 3.5%-4% level (McConnell, 2012).
5) GDP growth rate and Exchange Rates
An exchange rate is the number of units of one currency exchangeable for one unit of another. One of the factors which affects the exchange rates of a country’s currency is the US real GDP and for Australian dollar it’s the Australian Real GDP. In the case of both the countries there has been a case of increasing real GDP and the same has resulted in the increase in the supply of the currency and which has resulted in the reduction in the level of exchange rates.
The other variable which affects the exchange rates in real time is that of inflation rates of the country. Both US and Australian economy has seen its CPI increase over the last twenty odd years which shows that comparable rates of inflation has gone up even if at lower rates. This has caused the supply of dollars to the other countries and reduction in the overall demand for the US$ and A$ and as result of which the A$ and US$ has gone on to lose some value or depreciate in the same period (Cortinhas, 2013).
The third factor which has affected the exchange rates is that of prevailing interest rates. An increase in the interest rates would cause lower supply of currency and the same has happened in both Australia and US economy. Hence as the level of interest rates went up resulting in lower supply , the same has caused their respective currencies to appreciate in value.
b) Based on your summary statistics , graphs and analysis and discussion above write a short perdiction of the macroeconomic outlook of Australia. Is Australia likely to experience a recession or expansion soon?
Prediction for Macroeconomic outlook for Australia
At this point of time the Australian economy is growing at a decent rate of 2-3% approx.. the cash rate pursued by the RBA is seen to be lowering further and stabilize at around 1.5% giving reason for higher investment demand. Household consumption would remain robust and grow by .5% annually over the next few years. However the net experts would remain a concern for the economy as prices have not risen to the pre 212 level and even if world economy ( including china has recovered to some extent) , the same is not strong enough for a full value and volume recovery. Thus the net exports are expected to be negative in the next few quarters. Inflation as shown by the CPI of the country is expected to be concentered around 1-7-1.8% (based on the CPI) and this means the GDP growth would be higher than inflation and hence real standard of living would improve (Besanko, 2012). Consumption expenditure which is by far the largest part of the GDP would improve marginally and hence a short to medium term growth of GDP between 2.2%-2.6% can be expected and unemployment rate likely to decline by .3% over that of 2015. So overall the Austrian economy is expected to expand and not contract as the world economy is in recovery mode and hence like the US economy Australian economy is not expected to grow too much. As a result of the positive trends affecting the Australian economy such as the drag form the mining investments in recent years comes to an end and reflected in growing demand would cause the GDP growth probability to be better 2017 onwards. The Australian government and the RBA has also undertaken an accommodative monetary policy which is more likely to push for higher Exaggerate demand and support other growth oriented initiatives. As the RBA cash rate is being steady the same is also likely to push the investment demand and support expanding of the employment opportunities to push GDP growth higher in the coming years (Bade, 2011).