Evaluation Of Macroeconomic Performance Of Australia And USA

Some financial market commentators often assert that changes in USA’s real GDP have the tendency of causing recessions and expansions in Australia, because Australia trades with the USA and its economy is small relative to the economy of USA. Do you agree or disagree with this assertion? Critically discuss.

To answer the question, obtain Australian and USA data from 1985 – 2015/16 on real GDP growth rates, yearly exchange rate movement, net exports (NX) growth rates, interest rates (i.e. Australia’s Cash rate and US’ Fed funds rate).

Produce appropriate statistical tables and pair-wise graphs of each series (e.g. cash rate vs Fed funds rate) and critically analyse and discuss their relationships to reach your conclusion.

In your discussion, provide plausible economic explanations, including the impact of fiscal and monetary policy in both countries, for the relationships among the series.

Research Questions

A relationship between Australia and the United States is evident in various sectors: defence and national security, science and technological research, the creative industries, and – the centre of this report – economic relations. Economic historians classify Australia as resource-rich, but capital-wisely poor. Australia's technologically advancement, prosperous, is the legacy of generations of individuals, households, enterprises, and government. Insufficiently understood by many Australians is the American contribution to these nation-building investments (Leamer and Storper 2014, pp. 63-93).

 The U.S.-Australia Free Trade Agreement increased the U.S. exports to Australia by over 100% since its inception in 2005. The total US trade relations with Australia were about $65 billion in 2015 with a trade surplus for the US of about $29 Billion. The US exports have been able to create employment for around 250000 people especially in the manufacturing, travel and tourism, industrial supplies, consumer goods as well as financial services. On the other hand, the Australian exports have been able to support the foods, feed ad beverages, industrial supplies, business and travel services (Thurbon 2015, pp.463-467).

The following are the proposed research questions for this research report;

• Economic trends and changes in the economies of both Australia and United States
• Expansions and recessions faced by both economies
• Impact of growth in GDP of one of the economies on the other economy
• What are the trade relations between Australia and United States

In this research, we support and agree with the idea that economic changes in the United States will affect the Australian economy. It is evident because the Australian economy is relatively smaller as compared to the United States and we believe that the American GDP changes will affect the GDP of Australia. Financial conditions and investor confidence are factors that influence economic decisions globally. For instance, the small interest rate movements are able to shift significant amounts of capital which may affect the value of currencies present in the world. Research shows that both countries have experienced economic recessions almost the same period. This goes to state that economic changes in the United States which are a larger scale economy affect the Australian economy. Australia’s relationship with the United States is well developed and has remained so for a long time.

For a long time, the United States is one of the world’s largest economies that has managed to maintain its position at the very top consistently over the years. It has also experienced periods of slow growth rates with a stagnating level of the standard of living as well as a number of recessions experienced between 1985 and 2015 (THU THUY 2016, pp.89).

The Federal government has a role in maintaining economic stability. In order to achieve the economic goals, the United States uses both the fiscal and monetary policy. Using the monetary policy, the government is able to control the amount of money in the economy. The money supply is increased in order to facilitate transactions which spur investment. ON the other hand the fiscal policy is used in terms of taxation policies meant to affect government expenditure and the amount of disposable income available to individuals. In as much as the government may try to affect the economy, it might have a limited role since it depends on the level of recession as well as the budget deficits experienced. For example, in the 1970s, the country had experienced high levels of deficits which further increased in the 1980s. In this situation pushing for more taxation policies would be quite ineffective in handling the current economic situation (Abbott 2015). In the 1980s, the government resulted to the use of contracting debt using the fiscal policy. During that time there was an increase in international trade opportunities as well as the technology advancement of new products which provided little room for the government policies to stimulate growth. The low budget deficits would however reduce government borrowing which would contract the interest rates further which may have had a positive effect on investments. Eventually, in 1998, the federal budget became a surplus.

Discussion

The late 1990,s proved that fiscal policies were ineffective in achieving economic targets.  However, they aimed at narrower policy changes which were designed to improve the economy especially at the margins. They therefore opted to reduce the taxes imposed on the capital gains in that way they hoped to provide an incentive to investment. The GDP growth rates of the US have been declining as well as in developing countries. In the 1950s it was well before the 4% mark. In the 1970s, it was 3% and in 200s it is below 2% and it has never been increased  (Cúrdia et al. 2015, pp. 72-83).

In the vicinity of 1985 and 2015, the United States is said to have experienced five noteworthy recessions. In 1980, after by a brief time of extension and afterward a profound downturn. Joblessness remained moderately lifted in the middle of recessions. The recession started as the central government raised loan fees to battle the swelling of the 1970s. (Nov 1982) −2.7% the sharp increment in the cost of oil far and wide in 1979, causing the 1979 vitality emergency. This sent out oil at conflicting interims and a lower volume, compelling costs up. Tight money related arrangement in the United States to control swelling prompted another recession.(June 1992) After the longest monetary extension time of the 1980s, expansion rates started to take off, and the Federal Reserve struck back by raising loan fees from 1986 to 1989. This debilitated however did not stop financial development, but rather the mix of the ensuing 1990 oil value stun, the deficiency collection of the 1980s, and developing purchaser cynicism joined with the debilitated economy to create a short recession (Garcia 2013, 1267-1300).

The 1990s were a positive period in the monetary development in the American history. Incredible Recession (October 2009) (−5.1%) Falling of lodging related resources prompted a worldwide monetary emergency, even as oil and nourishment costs took off. The emergency caused the disappointment or defeat of a significant number of the United States' major monetary establishments. Making the administration react with a phenomenal $700 billion bank bailout and $787 billion monetary boost bundle.

Economic expansion was under control by the mid-1980s. Influenced by low and unfaltering oil costs in conjunction with a lofty gratefulness in private venture region and expanding salaries, the economy entered what was at the time the second longest financial development term in U.S. history. Blemish 1991– walk 2001 after a gentle subsidence that finished in 1991, the U.S. gone into its most drawn out time of monetary extension, enduring precisely ten years. As organizations and the legislature made critical buys of PC gear and programming, particularly amid the most recent six years of the development. Another brief subsidence happened in 2001, trailed by a direct increment. The home costs that had started in the late 1990s kept, invigorating creation business openings in development and different lodging related areas. A lofty downturn started towards the finish of 2007, conveying a conclusion to the Great Moderation, a time of stable financial progression and business development that started in the mid 1980s. In June 2009 after the Great Recession of 2008-2009, endeavors were made to stifle swelling as the work division recuperated, taking into consideration an extraordinary time of more than six years when the government reserve's rate was at an almost zero level (Panayotou 2016, pp.140-148).Economy Of Australia

The Economy of the United States

The Australian Economy is one of the largest mixed market economies in the world. The country has an annual GDP of about 1.5 Trillion USD. It also has the largest nominal GDP and the 15^th largest GDP per capita with consideration for the purchasing power parity. It is the worlds 19^th global importer as well as exporter. The nation’s economy has often experienced a gradual increase with no recession experienced in the recent past.

In 1972, the economy experienced stagflation since there was a slowdown in economic growth while there was an increase in the unemployment rates. This situation was due to poor governance which further enhanced it. There were some improvements in 1980s due to trade liberation actions by the government. However in 1987, there was black Monday that marked the beginning of a worldwide recession. Australia managed to survive since it experienced less inflation compared to the rest of the world and it experienced growth from 1990s until 2008. The government managed a stimulus package which prevented a domestic downturn. The country has experienced 24 steady years of continuous GDP growth.

In the recent years, the rate of increase has fallen below the mean at the rate of 2% and 2.5% at about 1% point below the long term average. Also, the growth in income has declined and therefore the GDP has also declined. The GDP growth is slow but positive while the income growth is negative. There has been a decline in the real incomes.

The Australia’s public policy largely depends on the fiscal policy in order to play an important part in providing a system that can ensure that the economy passes through checks and balances. The policy ensures that there is a predictable and stable macroeconomic environment which can lead to economic growth of the country. It therefore creates an attractive environment for businesses and makes sure that the firms are able to generate investor confidence. The fiscal policy has also helped the country overcome recessions and economic downturns. The discretionary fiscal policy was implemented in 1970s and the beginning of 990s in response to the global financial crisis in 2008. There were sizeable federal budget deficits through the Reserve bank which also ensured that they set interests on loans which could positively affect the economy (Bech et al. 2014, pp.99-119).

The US economy is one of the largest economies in the world in terms of nominal GDP as well as the purchasing power parity. The size and economic state of the country has remained constant over time with a steady growth over the years. It is however projected to continue to grow over the years (Auboin and Engemann 2014, pp.715-743.). On the other hand, Australia’s economy has also experienced a steady growth and it is considered as the second wealthiest country with regard to the GDP. The dominating sector in Australia is the service sector. The country has not experienced a recession since July 1991.

The United States has remained a significant foreign investor for Australia as it accounts for up to 28.4% of investments from other countries. It also acts as the number one destination for investment internationally as it also accounts for 28.6% of the total overseas investment stock. 2015 data shows that the United States was the second major two way trading partner of about $70.2 Billion. The Australian exports amounted to $14.2 Billion to the US while the total imports from the US were $33 billion. The bilateral services trade were consistent with services exports to about $7.9 Billion and imports of about $15.1 Billion. There is economic coexistence between the two nations. There is codependent between the two nations’ economies. This relationship has been useful in promoting certain economic targets in the countries. There is sufficient support in Australia for the bilateral defense cooperation with the United States. This makes both countries valuable trading partners to each other.

Central banks use interest rates as monetary policies which act as tools to manage employment growth and inflation. In the United States and Australian republic, the rates established by the central banks are somehow similar; relative changes in the interest rates all seem to occur at the same duration and almost to the same rate (graphs provided to ascertain this). Though it is not out rightly evident the exports and import percentage rates to the gross domestic income of both nations sort of support the fact that the US economy influences the Australia economy.  

Graph of percentage GDP annual growth, sourced from World Bank, databank

Conclusion

Based on our research we have found out that there exists close trade and economic ties between the United States and Australia. It is also notable that significant changes in either of the economies have in one way or another influenced economic decisions on the other economy. The United States being a larger and more developed economy has more evident impact on Australian economy.  In accordance to our research, United States plays a big role than other country to the economy of Australia since it is largest investor and the largest destination of Australian investment. The cumulative value of two-way investment between the United States and Australia is more than A$1.5 trillion, which is nearly as large as Australia’s gross domestic product. This shows how changes in USA’s real GDP have the tendency of causing recessions and expansions in Australia.

References

Leamer, E.E. and Storper, M., 2014. The economic geography of the internet age. In Location of International Business Activities (pp. 63-93). Palgrave Macmillan UK.

Thurbon, E., 2015. Ten years after the Australia-US free trade agreement: where to for Australia’s trade policy?. Australian Journal of International Affairs, 69(5), pp.463-467.

Panizza, U. and Presbitero, A.F., 2014. Public debt and economic growth: is there a causal effect?. Journal of Macroeconomics, 41, pp.21-41.

Cúrdia, V., Ferrero, A., Ng, G.C. and Tambalotti, A., 2015. Has US monetary policy tracked the efficient interest rate?. Journal of Monetary Economics, 70, pp.72-83.

Garcia, D., 2013. Sentiment during recessions. The Journal of Finance, 68(3), pp.1267-1300.

Panayotou, T., 2016. Economic growth and the environment. The environment in anthropology, pp.140-148.

THU THUY, N.G.U.Y.E.N., THI THU GIANG, D.A.O. And HUY HOANG, T.R.U.O.N.G., 2016. The Determinants of Merger Withdrawals’ Abnormal Returns in The Australian Market. Journal of Economics and Development, 17(3), p.89.

Abbott, A. and Jones, P., 2015. Fiscal Illusion and Cyclical Government Expenditure: State Government Expenditure in the United States. Scottish Journal of Political Economy.

Bech, M.L., Gambacorta, L. and Kharroubi, E., 2014. Monetary policy in a downturn: are financial crises special?. International Finance, 17(1), pp.99-119.

Auboin, M. and Engemann, M., 2014. Testing the trade credit and trade link: evidence from data on export credit insurance. Review of World Economics, 150(4), pp.715-743.

Asem, E., Chung, J., Cui, X. and Tian, G.Y., 2016. Liquidity, investor sentiment and price discount of SEOs in Australia. International Journal of Managerial Finance, pp.25-51.