ECON6001 Economic Principles
a) Analyse, individually and in teams the role of fundamental micro- and macroeconomic principles in business decision-making.
d) Critically evaluate the applicability of various theories to economic policies and business decision making related problems.
e) Critically evaluate the role and impact of various forms of government intervention in the economy including business implications.
f) Communicate complex economic concepts to business professionals.
Assignment 3 assesses students’ understanding of the concept of market failure and allows them to critically evaluate the involvement of the public sector in minimising the adverse effects of market failure to society.
In groups of 3 students you are expected to prepare a 2000 words Research Report which addresses the following:
Select a pair from the following countries that have adopted inflation targeting as a monetary policy tool.
Pair 1 Canada Australia
Pair 2 New Zealand Norway
Pair 3 Sweden United Kingdom
Pair 4 Indonesia Thailand
Pair 5 Botswana Iceland
(a) Critically evaluate how this policy has been successful in ensuring the economies attain stable price stability, steady economic growth and reduced unemployment rate since adoption. Your discussion should include a comparative analysis of the two countries and you must make a judgement on which of the two countries has achieved better outcomes using inflation targeting. (800 words) (25%).
(b) Of the less successful country, provide an explanation of what could have impeded policy implementation. (350 words) (10%).
(c) Using the same two countries selected, critically evaluate how they have utilised fiscal policy during the global financial crisis of 2008/2009. (550 words) (15%).
(d) Justifying with evidence (qualitative and quantitative), which of the two countries was more successful in minimising the potential negative effects of the recession? (300 words) (5%)
This report has discussed the impact of the global financial crisis in the Canadian and Australian economy. During the global crisis, the GDP rate of Canada shrank by 2.77%. Additionally, the bank investment rate and export rate have decreased over the years based on high debts and expenses. This can be recognized as one the main reason that can impede the policy implementation in the market. On the other hand, Australia has experienced the fastest rises in public debts compared to other countries during global financial crisis. During the global financial crisis period, the Australian Government has been able to adopt the rules and regulations of the International Accounting Standard Board (IASB). This has helped the country to improve Australian Accounting Standard Board and government fiscal policies. Australian Reserve Bank is found to be focusing on monetary policy for bringing stability at price in the country. In the present case, Australian bank is seen to be using flexible medium-term target of inflation. The main objective of monetary policy of Canadian bank is to maintain low and stable inflation. In the current context, it is noted that Canadian policy of monetary is emphasized towards promoting price stability, besides harnessing advantages of low inflation.
Critical evaluation of price stability, economic growth and unemployment rate
Australian Reserve Bank is found to be focusing on monetary policy for bringing stability at price in the country. According to Cacciatore et al., (2016), the inflation rate is used for achieving price stability in any country. In the present case, Australian bank is seen to be using flexible medium-term target of inflation. The goal of Reserve Bank is to keep the rate of inflation between percentage 2 and 3 over time and on average. In addition to this, it is also noted that Australian Bank has set rate of cash for influencing inflation and economic activity for achieving goals of Reserve Board. The price rate of the Australian product is increasing due to increasing demand for products of Australia. The increase in the supply of services and goods is putting pressure on the product's prices of Australia. The main focus of framework of the monetary policy of Canada is to keep the rate of inflation predictable, stable and low (bank of Canada, 2018). The excess demands of Canadian products are increasing the price, which results in building inflationary pressure.
The main objective of monetary policy of Canadian bank is to maintain low and stable inflation. Hussen (2018) noted that low inflation results in having excess actual output as compared to potential output, which needs to be avoided for maintaining price stability in country. In the current context, it is noted that Canadian policy of monetary is emphasized towards promoting price stability, besides harnessing advantages of low inflation. It was done by keeping the interest rates low, supporting the productive investments that make Canadian economy sustainable. Furthermore, the policy is focused on making economy of country grow at non-inflammatory speed and generates new jobs and higher income. It is further noticed that Canadian monetary policy is simply guided by target of inflation-control. The target of inflation includes 2%, which is the midpoint of 1 and 3% range of control (bank of Canada, 2018). In addition to this, targeting inflation plays essential part in reducing expectations of long-term inflation, besides anchoring around 2%.
Federal government and Canadian bank sets the framework of monetary policy and review it after every six years. It is noted that relative stability on the growth rate of economy is seen in Canada due to capacity of monetary policy for economy’s production. Moreover, excess supply and demand are not included in Canadian monetary policy, which made actual output to be close to the potential output. It has therefore increased the economic rate of Canada to about 1.41% in year 2016 (Statista, 2018). Therefore, it is noticed that Canadian economy is growing with the greatest speed after the implementation policy of monetary policy. On another hand, it is found that economic condition of Australia strengthened after 2017 after the proper implementation of monetary policy.
The increase in the wage rate in labor market enhances the number of labors in the country, which thereby improves the economic ate of Australia. Furthermore, it is also noted that monetary policy has increased investment growth, which is thereby increasing Australian economy. Kurov & Stan (2018) commented that monetary policy is helpful in enhancing economy of domestic country by improving quality of services as well as goods. In the present case, it is seen that monetary policy has provided added support to economy of Australia by making services and goods more competitive. It also enables domestic products of flow through increased domestic inflation through higher prices of import.
In Australia, it is noticed that Australian Reserve Bank has the responsibility of implementing and formulating monetary policy. It is noted that unemployment rate of Australia has fallen to about 5.5% since 2013 of March (rba, 2018). The monetary policy in Australia is focused on achieving objectives of Board of Reserve Bank. The board has the responsibility to manage rate of interest for bringing stability in the currency of the country. It also includes economic prosperity, full employment as well as welfare of Australian people. On the other hand, it is found that monetary policy of Canadian banks is more focused on controlling inflation.
The proper control of inflation results in reducing output growth and unemployment rate of country. Contrary, Guzman et al., (2018) argued that framework of monetary policy consists of flexible rate of exchange and explicit target of inflation. The same framework is available in the policy of monetary in Canada which is beneficial for promoting sustained economic growth and employment. The Canadian bank has focused on keeping focal point of inflation rate at 2 percent. Furthermore, political legitimacy in framework of the monetary policy is beneficial for reducing the unemployment rate of Canada. It is therefore noted that unemployment rate decreases with the implementation of policy of monetary. The employment rate of Canada is improving the employment as well as wage of the labor of country, thereby enhancing country’s productivity.
The implementation of monetary policy includes interest rate setting on the overnight loans in money market. According to Bech & Keister (2017), interest rate of economy gets influenced by interest rate on overnight loans at varying degree. The first step involved in implementing monetary policy in less successful country, such as Canada, Australia includes proper maintaining of money market. The Australian bank aided banks to manage deposit and lending of cash from 0.25% points below and above target of cash rate (rba, 2018). The maintaining of money is essential as it helps in keeping rate of cash near or at the operating target as decided by Board. It is important to note that cash rate is charged on the overnight loans which occur between the financial intermediaries. The focus of Australian Reserve Bank is to keep cash rate close to the target while implementing monetary policy.
Transaction of money market is done for keeping cash rate very close to target. The operations of open market are conducted like auctions in Australia, which decreases or increases cash amounts that are held by Australian bank (rba, 2018). On the other hand, Canadian Bank emphasis on targeting overnight rate of interest, while implementing monetary policy. It also reinforces target rate by buyback operations. In addition to this, Canadian bank is also focused on cash setting for implementing monetary policy.
During the global crisis, the GDP rate of Canada shrank by 2.77% (Citeseerx, 2018). Additionally, the bank investment rate and export rate have decreased over the years based on high debts and expenses. This can be recognized as one the main reason that can impede the policy implementation in the market. As the financial crisis of banks and other business organization increased the Canadian government failed to expand their taxable profit. Low tax profit has increased financial crisis for the government and government has failed to implement relevant fiscal policies in the crisis period. This has increased financial crisis for the business organizations of Canada and the possibility of bankruptcy has increased over the years. Finally, as the government of Canada has failed to improve their fiscal policies number of import and export decreased over the years.
During the global financial crisis period, both Australia and Canada have faced high negative impact in their fiscal policies. The economic growth of Canada has been efficient and better than other Organization for Economic Cooperation and Development (OECD) counties in 2007 (Bankpedia, 2018). The Canadian government has been acquired and no government bailouts for insolvent companies have been recognized in this period. This has helped the country to expand their economic health in the international market. However, during the crisis period, the financial system of Canada was less affected compared to other OECD countries (Bankpedia, 2018). Additionally, the banking sector of Canada has been able to maintain high financial performance per month. This has helped the business organizations of Canada to maintain their organizational performance per month. In relation to the report of World Economic Forum, it has been understood that in past six years Canada has ranked first place among 140 other countries based on its banking stability (Bankpedia, 2018).
During crisis period Canada maintained the following key elements of fiscal policies for maintaining financial growth.
Based on the key elements the country has been able to improve their fiscal policy system (Bankpedia, 2018). However, due to financial crisis the country has faced some financial difficulties. In the crisis time, the household balance sheet decreased by 8.7% (Citeseerx, 2018). The financial data from Canadian Banks is clearly showing the steep drops in both investment and export as onset of global recession [Refer to Appendix]. Therefore, the Canadian Government has been forced to improve Canada's Accounting Standards Board (ASB) for reducing the impact of global crisis.
On the other hand, Australia has experienced the fastest rises in public debts compared to other countries during global financial crisis (Cdn, 2018). During the global financial crisis period, the Australian Government has been able to adopt the rules and regulations of International Accounting Standard Board (IASB). This has helped the country to improve Australian Accounting Standard Board and government fiscal policies. The government has reduced their tax policies in 2008 and 2009 for the Australian business organizations so they can maintain proper financial growth per year. Additionally, the banks have been able to maintain stability during the crisis period. The government budget expenses have decreased in the crisis period based on the county's fiscal policy. In 2008, total government receipt has been $293 billion. Payment has been $316 and the net debts have been -$16 billion. In 2007, the net debt of Australia has been -$45 billion (Business, 2018). Therefore, the net debts have decreased and the economic health of the organization has improved in the crisis period.
In addition to that, during financial crisis period a discussion about the prospect of global recession has been performed. The Prime Minister, Treasurer, Deputy Prime Minister and other senior Ministers had a meeting in July and August of 2008. Based on the discussion the government of Australia introduced the Reserve Bank of Australia (RBA) for improving their economic and fiscal policies (Treasury, 2018),. This bank has helped the country to reduce their annual debts in the crisis period and economic health of Australia increased.
During the crisis period, Canada has been able to maintain a strong financial health compared to Australia. However, the Canadian economy did not have the same effect as the Australian economy. Global crisis had a low effect on Canada however; the effect on Australia has been strong and high. However, the government of Australia has been able to take fast and effective action against the global crisis and introduce improved policy to reduce it. During the crisis period, the banking sector and business organization of Australia have increased their net debts. Additionally, the GDP rate of Australia had decreased in 2008 therefore; the companies have been unable to expand their revenue. This has increased the possibility of bankruptcy for the business organization of Australia and the economic health of Australia decreased.
In addition to that, as the economic health of Australia decreased in 2008 the government improved their fiscal policies. The Australian government has reviewed rules and regulation of IASB and introduced International Financial Accounting Standards in AASB. This has helped the business organizations and banks to avoid unnecessary debts in the business. Additionally, the government has introduced tax benefits for the business organization so they can reduce their financial expenses per year. Based on the new fiscal policy the government reduces their import and export taxes to attract more customers to the country. This has also helped the country to expand the foreign cash flows in the market. According to Claessens & Kodres (2014), high foreign cash flow can help the business organization to sustain their position in the competitive market. Based on the fiscal policies it is clear that Australia has been most successful in reducing the potential negative effects.