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International Economic Interdependence

Question:

Discuss about the Communication Technology and True Real GDP.

In a globalized world, nations become increasingly interrelated with each other. Interaction among nations is not only in terms of visible trade but also in terms of invisible trade that is trade of services.  The relation becomes stronger when countries make investment in each other market, loan give abroad and capital repayment. The cross border transaction and hence international relationship becomes an integral part of globe. National generally benefitted from transaction take place on international platform. In the process, the dependency among nations increases especially for small nations. The small here not only points to the geographical size but to the economic power. The greater economic power a country has, the more it has impact on other nations.

One such economy having considerable global power is USA. The single nation has control over many nations, comparatively small sized.   USA and Australia are two nations sharing a strong economic relation. They traded goods and services and invests significant amount on each other market. However, Australia is comparatively small size as compared to USA. For this reason, many commentators opine that USA can have large impact on Australian economy.  When real GDP in USA changes then there are possibilities that is causes an expansion and contraction of Australian economy. Many related factors here needs to be considered such as trend in et export, movement if exchange rate or interest rate. The report examines this assertion in light of economic theories and historical data.

There are many large economic players impacting on global scenario through their fiscal, monetary and international monetary framework. United States of America and  Australia are two such nations that are two dominating player in the international world. Apart from their impact on other nations  these two nations share political shared political and socio economic relation with each other.  Goods and services are traded and there are both way flows of funds between nations. The international relationship established between the nations went on stronger day by day signifying an economic dependence (Dowding and Martin 2017).  USA ranks fourth in the list of Australia’s importers.  Goods from Australia overflow Australia market and contribute to job growth in Australia. In return, Australia also imported considerable amount of goods and services from USA. This shows the mutually beneficial trade relation between the USA and Australia. The bilateral trade agreement between USA and Australia that came into effect on 2005 strengthen the relationship between nations. USA always maintains a positive trade balance in trade with Australia. USA is second largest importer of Australia. The trade agreement removes all the trade barriers such as tariff, quota and other restrictions. Therefore, all the hurdles of trade between nations eliminated further strengthening the trade relation.

US and Australia Economic Relationship

The FDI from USA to Australia has significant impact on Australia’s economy.  The funds flow from Australia to abroad the largest share is acquired by USA. The productive investments positively contribute to growth and prosperity of both the nations. Australia has a favorable business environment attracting foreign funds. US firms operate in Australia for over 100 years and generate jobs for many Australian (Mukulu,  Hettihewa and Wright 2014).

International trade relation and resulted dependency is an interesting area of research.  The above section shoes relation between Australia and USA in Terms of visible and invisible trade and relation and capital investment. The friendly relation between the nations is one reason for assuming the dependency on each other. USA, for its relatively large size of the economy influences many economies.  The growing trade and investment relation is suggests an obvious dependence between the nations.

This belier resulted in an ongoing debate. There are one group of commentators believing that  international relation exits  in terms of economic dependence. Hence, when GDP of USA changes is causes a change in economy of Australia causing expansion or contraction of the economy. However, many do not believe that. GDP of a nation depend on a number of factors.  Therefore, considering only GDP as an indicator of dependence does not got give right assertion. Flow of investment, net export, movement of exchange rate and interest rate are factors that need to be considered. Historical data for a significantly long period are considered for evaluation.

Real GDP resents values of final goods and services using market values of a fixed base year(Bernanke, Antonovics and Frank 2015).  GDP for USA and Australia are considered for the period 1985 to 2016. The similarity in GDP movement indicates a relationship between nations. However, as there are several factors influencing GDP no firm conclusion can be made from this analysis (Welfens and Perret  2014).  This is only a starting point if the analysis.

The above figure shows some similarity in GDP movement between USA and Australia. The GDP in USA  is higher than Australia over the entire period.  The intensity of fluctuation is grater for USA than that for Australia.  In 1991, GDP of both the nation  declined from  the previous  year. The grow rate in USA was -3% to -4% while that in Australia was -1%  to -2% (Lindert and Williamson 2016). GDP in Australia peaked up to 3% in 1997 in Australia. I the corresponding year USA also experiences a high growth rate where growth rate exceeds 5% . Again in 2000-2002 growth rate of both the nations falls and accounted growth rat almost same for both the nations. The accounted growth rate during this time is just below 0%. The similar growth trend is observed in 2003-2004.  During 2008, USA experienced great recession that affects the GDP and GDP in USA fell to -8% to – 9%. Australia in this time also faced a negative rate of growth. However, the growth rate is not that much lower than USA. The growth rate in Australia in that year was between 0 to -1% (Abdullah 2017).  Therefore, analysis of GDP indicates some common point of fluctuation.

Investment and its Impact on Growth and Productivity

Every year United States made major investment go to in Australia. Australia received significant investment assistance from USA.  The share of investment grows overtime. Investment in an economy is an important determinant of growth and productivity (Hirst, Thompson and Bromley 2015).  Therefore, major share of USA’s investment shows Australia’ growth dependence on Australia. In the list of countries where Australia invests United states is in the top position.  The large size and economic power of United States attract foreign funds in USA.  Australia

Foreign investment is determined by the prevailing interest rate in the economy. A high and stable interest rate attracts foreign funds in the domestic country. It ensures a stable return to the invested assets. Higher the internal stability in the economy greater is the securities of the funds invested in the nation (Rousseau and Wachtel 2017). The interest dynamics are shown in the following figure

Interest rate of both the nation has undergone with fluctuation in different periods. However, interest rate is higher in USA that that in Australia and it remains higher overtime. The high interest rate in Australia attracts more funds (Summers 2014.). However, viewing the benefits from relation with a powerful nation countries make investment in USA and hence, USA received foreign funds.

Year

Export

Import

Net Export

1985

5,440.40

2,836.30

2,604.10

1986

5,551.10

2,627.70

2,923.40

1987

5,494.80

3,005.50

2,489.30

1988

6,972.90

3,541.40

3,431.50

1989

8,331.30

3,872.90

4,458.40

1990

8,537.70

4,446.60

4,091.10

1991

8,403.80

3,988.00

4,415.80

1992

8,875.90

3,687.60

5,188.30

1993

8,276.70

3,297.30

4,979.40

1994

9,780.60

3,202.10

6,578.50

1995

10,789.10

3,323.00

7,466.10

1996

12,008.40

3,868.90

8,139.50

1997

12,062.90

4,602.30

7,460.60

1998

11,917.50

5,387.00

6,530.50

1999

11,818.30

5,280.10

6,538.20

2000

12,482.40

6,438.00

6,044.40

2001

10,930.50

6,477.80

4,452.70

2002

13,084.90

6,478.80

6,606.10

2003

13,087.60

6,413.70

6,673.90

2004

13,957.90

7,545.50

6,412.40

2005

15,588.50

7,342.20

8,246.30

2006

17,545.70

8,204.00

9,341.70

2007

19,178.20

8,615.00

10,563.20

2008

22,218.60

10,588.80

11,629.80

2009

19,599.30

8,011.50

11,587.80

2010

21,804.60

8,582.90

13,221.70

2011

27,626.20

10,242.90

17,383.30

2012

31,161.40

9,566.80

21,594.60

2013

26,123.70

9,272.60

16,851.10

2014

26,681.70

10,697.30

15,984.40

2015

25,034.10

10,883.50

14,150.60

2016

22,159.70

9,509.90

12,649.80

(Source: state.gov 2017 )

The above table represents  trade dynamics between USA and Australia. The export , import and trade balances are expressed. USA maintains a positive trade balance. The export from USA is greater than that it import from Australia. The growth rate of export is higher than the growth rate of import. The volume of export in 1985 was 5440.40 that becomes 22, 159.70 in 2016.  The import on the other hand boosted at a significantly slower pace (Rachel and Smith 2015). Import volume in 1985 was 2836.30 while that become only 9509.90 in 2016. As a result, the trade balance grows at a faster pace.  Net export grows from 2,604.10 to 12,649.80 in between 1985 to 2016.

The related aspect of trade is the movement of exchange rate.  An increase in exchange rate means depreciation of domestic currency. In this time importing from other countries become expensive while export grows as the goods of the concerned countries seem cheaper to foreign countries. A decrease in the exchange rate means appreciation of the domestic currencies (Giljum et al. 2014). During this time, import grows as import becomes cheaper and export slows down as goods becomes dearer fir the foreigners.  The exchange rate determines the trade volume largely.

Trade Dynamics between USA and Australia

Above figure explains movement if exchange rate of US dollar in respect of Australian dollar. The exchange rates of US dollar against the Australian dollar more or less goes down. This means a depreciation of US dollar, which encourages export from USA to Australia (Tukker et al. 2014). This provides support to the fact that export from USA to Australia increases overtime.

If there are strong relation between Australia and USA and string interdependence then the great recession that intensively affect  USA should have similar kind of impact on Australian economy as well.  The great recession in Australia took place in 2008 due to sub-prime mortgage and crisis in the housing market (Apergis 2014).  Because of a low and volatile interest rate the bubbles build in the housing market suddenly burst affecting USA economy on a broad spectrum. The large size of USA economy makes the crisis to trickle down to other nations as well. Housing price goes down in USA during this time (Hansen 2015).

The economy of Australia escapes from this recession on a surprising manner. The housing market is Australia remain stable. Interest rate in Australia did not constitute and sudden downfall. In the housing market of USA and other contemporary nations, inflation adjusted prices went up (Reboredo, Rivera-Castro and Zebende 2014). While Australia had showed an upward trend in housing prices as contrasting to other nation and the general assertion.

There is no change major change in Australia’s performance trend.  One factor is that apart from USA, Australia builds is international relationship with other nations as well (Ball 2014). There are trade relation and investment relation among Australia and other nations. This helps the nation to mitigate risk generated from USA recession. When a nation engaged in multilateral trade relation then the vulnerability to shock to  any one trading partners automatically reduces.  Additionally, Australia grows stronger overtime. Different sectors of the economy are now performing well and hence provide security to the growth and development of the nation (Yilmazer, Babiarz and Liu 2015). The financial sector of Australia is one such sector that shows outstanding performance and rescues the economy from shocks and recession occurred in USA.

Conclusion

The report critically evaluates the relation between USA and Australia. Relation builds on international platform has implication for growth and development of a nation. The interrelation often implies when country is in growing or declining phase of growth then related nations are affected from this. One such assertion is made about relation between Australia and USA. The belief here is that the Real GDP movement in USA causes expansion or contraction of Australia economy. In order to validate the statement, historical data on real GDP for both the nation are first considered.  From the analysis there turn out some common fluctuation point between USA and Australia. However, the common points are not enough for drawing any conclusion. Foreign investment flows from both the nations are next  indicators to be considered.  The statistics shows that USA is the major investors of Australia. Similarly, Australia also invests as much as possible in USA. In fact, the lion share of Australia fund is invested in USA. Related aspect of investment is the dynamics of interest rate. Interest rate in Australia  is higher and less volatile attracting foreign funds for the economy.  The trade volume between USA and Australia rises overtime and USA maintains a positive trade balance. The exchange rate movement between US dollar and Australian dollar though volatile but decreasing in nature, raising the export flow from USA to Australia. Finally, the impact of great recession in USA on Australian economy is analyzed.  The effect of great recession in USA has an ambiguous impact of Australia. Therefore, the claim cannot be completely supported and the relation dynamics remains versatile.

References

Abdullah, A.B.M., 2017. Introduction. In Managing the Psychological Contract (pp. 1-22). Springer International Publishing.

Apergis, N., 2014. Can gold prices forecast the Australian dollar movements?. International Review of Economics & Finance, 29, pp.75-82.

Ball, L.M., 2014. Long-term damage from the Great Recession in OECD countries (No. w20185). National Bureau of Economic Research.

Bernanke, B., Antonovics, K. and Frank, R., 2015. Principles of macroeconomics. McGraw-Hill Higher Education.

Data.worldbank.org. (2017). Real interest rate (%) | Data. [online] Available at: https://data.worldbank.org/indicator/FR.INR.RINR?end=2016&locations=AU-US&start=1984 [Accessed 21 Sep. 2017].

Dowding, K. and Martin, A., 2017. Introduction. In Policy Agendas in Australia (pp. 1-10). Springer International Publishing.

Fred.stlouisfed.org. (2017). U.S. / Australia Foreign Exchange Rate. [online] Available at: https://fred.stlouisfed.org/series/DEXUSAL#0 [Accessed 21 Sep. 2017].

Giljum, S., Dittrich, M., Lieber, M. and Lutter, S., 2014. Global patterns of material flows and their socio-economic and environmental implications: a MFA study on all countries world-wide from 1980 to 2009. Resources, 3(1), pp.319-339.

Hansen, P.H., 2015. Hall of mirrors: the great depression, the great recession, and the uses—and Misuses—of History. Business History Review, 89(3), pp.557-569.

Hirst, P., Thompson, G. and Bromley, S., 2015. Globalization in question. John Wiley & Sons.

Lindert, P.H. and Williamson, J.G., 2016. Unequal gains: American growth and inequality since 1700. Juncture, 22(4), pp.276-283.

Mukulu, S., Hettihewa, S. and Wright, C.S., 2014. Financial Contagion: An Empirical Investigation of the Relationship Between Financial-stress Indexes of Australia and the US. The Journal of Applied Business and Economics, 16(3), p.11.

Rachel, L. and Smith, T., 2015. Secular drivers of the global real interest rate.

Reboredo, J.C., Rivera-Castro, M.A. and Zebende, G.F., 2014. Oil and US dollar exchange rate dependence: A detrended cross-correlation approach. Energy Economics, 42, pp.132-139.

Rousseau, P.L. and Wachtel, P. eds., 2017. Financial Systems and Economic Growth. Cambridge University Press.

Summers, L.H., 2014. US economic prospects: Secular stagnation, hysteresis, and the zero lower bound. Business Economics, 49(2), pp.65-73.

Tukker, A., Bulavskaya, T., Giljum, S., de Koning, A., Lutter, S., Simas, M., Stadler, K. and Wood, R., 2014. The global resource footprint of nations. Carbon, water, land and materials embodied in trade and final consumption calculated with EXIOBASE, 2, p.8.

U.S. Department of State. (2017). Australia. [online] Available at: https://www.state.gov/r/pa/ei/bgn/2698.htm [Accessed 21 Sep. 2017].

Welfens, P.J. and Perret, J.K., 2014. Information & communication technology and true real GDP: economic analysis and findings for selected countries. International Economics and Economic Policy, 11(1-2), pp.5-27.

Yilmazer, T., Babiarz, P. and Liu, F., 2015. The impact of diminished housing wealth on health in the United States: Evidence from the Great Recession. Social science & medicine, 130, pp.234-241.

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