Discuss about the Critical Analysis of Various Macroeconomic.
The conducted report contains a critical analysis of various macroeconomic indicators of Australia and the USA from the year 1990-2015.This report gives an idea that how real GDP performance is related to other indicators of the country. It tells us the correlation between the macroeconomic indicators of both the countries. Furthermore, this report explains that the movements in macroeconomic indicators of the country affect the economy (Austrade, 2016). On the basis of tables and graphs, it gives an overview of countries economic performance in the past years. Finally, this report tells that the tighter monetary policy followed by country’s government in the past decade. On the basis of important macroeconomic indicators it also forecasts the country’s recession or expansion in future.
Real GDP growth related to other indicators in Australia and the USA
Australian economy faced the recession challenge in the year 1990.GDP is slowed down in the year 1990-1992.Due to the slowdown of GDP growth percentage, that leads to an impact on other macroeconomic indicators like the rise in the unemployment rate and interest rate in the period between 1990-2000.As the recession ends in the year 1991, the growth rate of the economy is positive after 1992 to 2000.The rate of Unemployment also declined and the CPI inflation is also reduced at a certain level. There was an average improvement in the import and export rate of the economy of Australia that results in the growth and productivity in the year from 1990 to 2000. Australian GDP growth rate is Zigzag from the year 2000-2008(in below figure 1) and the rate of inflation is constant between those two years i.e. 2000-2001(rba, 2016).The other variables like import and export rate are increased and decrease at a moderate level. The increase in export leads to improve the financial stability of the economy. The unemployment rate is declined as the GDP is increased. Inflation is also increased in recent years according to the growth in GDP. It is considered that there is in a rise in production at higher prices. In this scenario GDP and Inflation are both rises and the demand is exceeded the supply that leads to more competition in the market. The company needs to pay competitive wages to hold the labor. Exports percentage increased positively it shows that there is appreciation in the Australian dollar. It also maintains the balance of international payments (SMH, 2016).
Figure 1: Macroeconomic indicators of Australia from the year 1990-2015
USA GDP growth is shown an average increase from the year 1990-2000.But after the year 2000, the GDP growth is zigzag (Shown in below figure: 2). Inflation seems to decease from 1990 to 2015.It seems that the supply factor is stronger than demand factor in the economy of USA. The unemployment rate is slightly improving in the past years. It means that there is moderate growth in GDP impacts the unemployment growth rate. Firms are produced moderate, so they need few workers. Technological and structural change is also the factor that reduced the unemployment at a moderate level. Technological changes lead to high output but it is difficult for some workers that have insufficient skills to operate the new change. The rate of interest is shown increased in most of the past years. When the economy is growing the banks, company and individual spend more money to save opportunity cost. At the time of boom demand for borrowed funds is high that it is profitable to expand (Dell, Jones and Olken, 2016).
Figure 2 : Macroeconomic indicators of USA from the year 1990-2015
So, it seems from the above given data, it can be say that GDP is related to every economic indicator.
Correlation between inflation, interest rate, and uemployment
Inflation occurs when there is too much money is spends to chasing few goods in the economy. In the given table (Table: 3 Shown in Appendix) of Australian macroeconomic indicators, the Inflation rate is seen to be reduced as compare to the base year i.e. 1990 (Westphal and Rother, 2012).Inflation created a problem for central banks when it is constant rise. This situation arises when there is confusion between prices and wages of workers. The increase in price leads to the demand of high wages by workers, and it put pressure on companies to raise the wages. This can happen in the situation where the shortage of supply of labors. It indicates that strong GDP leads to risk for the interest rate.
From the given table (Table: 3 and 4 shown in Appendix) it shows the negative correlation between the inflation and Interest rate. The degree of strength of the correlation is weak or it can be said that there is a weak correlation between the two variables. It depicts that if the inflation rises then the rate of interest rate is decreased. It means that the borrowing capacity is increased and people borrow more money due to the low-interest rate that results to consumers have more money to spend, that increased the inflationary pressure on the economy. Similarly, the correlation between interest rate and unemployment is also negative i.e. 0.37 (Ferraro, Rogoff and Rossi, 2015).The degree of strength of the correlation is weak. It means that the rise in interest rate leads to lower the unemployment rate in Australian and US economy. As the cost of borrowing is higher that leads to a reduction in investment and consumer spending. In turn, this means investments are less in the market that results in a reduction of new jobs in the market. This has a negative impact on the unemployment rate. In the second table (shown in the appendix) it shows the positive correlation between the interest rate and inflation variable in the US economy. The degree of strength is weak between two variables. Lower interest rate creates more borrowing power in the hands of consumers. And when a consumer spends more the economy grows and creating inflation. But as per the given data, it shows that the increase in interest rate impacts little positive on the inflation rate. As the interest rate increases the inflation is also increase little bit i.e. 0.36% (Jappelli, Pagano and Maggio, 2013).
Correlation between the macroeconomic indicators in Australia and the USA
As per the given data (shown in Appendix), it shows the positive correlation between the two countries in some of the macroeconomic indicators such as GDP rate, Inflation rate, import and export rate. And there is a negative correlation between two macroeconomic indicators, like unemployment and interest rates between two countries. There are various ups and down in the Australian economy in the years 1990-2015.The GDP percentage went down to negative in the year 1991 due to the recession and weak policies of the government. But after that period the GDP growth was moderate in the past years. It reached to the maximum percentage in the year 1999 i.e. 5.01 due to low inflation and unemployment in that particular year. Similarly, the GDP of USA had shown the moderate rise in the past years (Baskaran and Feld, 2013); it went down to negative in the years 1991, 2008, and 2009 due to the recession and low production of goods and services in the country. But after that, the signs of growth are positive in the economy of USA. It can be seen that the USA economy contributes to smoother outcomes in Australia.
Other important variables like Inflation and import and export percentage of Australia is shown good in the past years. There is a positive correlation between Australian Inflation rate and USA Inflation rate i.e. 0.61.The degree of strength is good between these two variables of country’s economy.CPI inflation has shown declined positively in both the economies from past years. It means that the government has framed good monetary policies and the firms are confident and invested at large scale in both countries. Due to low inflation, both economies benefited from the financial crisis as the banking sector is strong so that the inflation is under control. Similarly, the import and export variables of both countries economy had shown the positive correlation i.e. 0.76 and 0.53 (Fan, Titman and Twite, 2012).The degree of strength is good among two variables. Import and export percentage increased annually at the moderate rate in both the economies. It depicts that the policies of international trade are flexible and minimum restrictions on import and export. The flexible policy benefited to consumers to buy goods and services at low prices. Lower tariffs encourage more exports in the economy. The increase in imports created a healthy competition in both the economies of the country. It also impacts the currency of the both the countries. From the given data of both the countries (shown in Appendix) it can be seen that if there is an increase or decrease of two variables (import and export) of one country, there is also a significant rise of two variables in another country also. Because both variables depend on each other country on the basis of cost, raw material, skills, and policies.
The negative correlation between unemployment and the interest rate of the two countries, the degree of strength is a weak. It indicates that the increase in the rate of variables in one country results in the decrease in the rate of the similar variable in another country. Australia faced the issue of unemployment in past recent years may be due to financial crisis, wages problem and demography. Unemployment occurs due to wages problem in the country. Skilled labors get fewer wages as compared to their skills. At the same time, the USA outsourced the skilled labor with decent packages that reduces the level of unemployment in the USA. Another variable is interest rate is went down due to currency differences of two countries. Australia spends more to appreciate the value of the currency and the USA spends less to purchase the goods and services of the Australia. Due to differences in currencies of the two countries, the interest rates are inversely related to each other (Koellinger and Thurik, 2012).
Tighter monetary policy in past decade
As per the given data of both the countries, it is considered that the USA tightened the monetary policy as compared to Australia. Inflation data of Australia indicated the average increase of inflation rate was 2.73% from 1990-2015.And on the other hand in the USA, an average increase of inflation is 2.53% and the interest rate was 3.97% from 1990-2015 (Taylor, 2013).On the basis of Inflation rate data of the both the countries, it is considered that the USA had tightened the monetary policy due to the high inflation rate and interest rate. Tight monetary policy involves raising interest rates. High-interest rates lead to borrowings became more expensive so that the consumers and firms spend less. It encourages savings, Therefore firms and consumers have kept their money in the banks. Due to inflationary pressure, it affects the exchange rate of the country and tax structure.USA federal raising interest rates to appreciate the value of the dollar so that increase the savings rates in the country (White, 2012). An appreciation in currency helps to reduce the inflationary pressure in the economy. The government also tightened the monetary policy to limit the supply of money. Due to less supply of money, it increases the demand for long-term bonds in the financial institutions. By sell off bonds there is a reduction in liquidity and therefore reduce the rate of lending in the market.
High-interest rate does not always control the inflationary pressure in the country’s economy. There are other factors like for example rise of oil prices in tight monetary policy lowers the economic growth of the country. Australian government followed the easier monetary policy because the average rate of interest from the year 1990-2015 is 3.68% i.e. comparatively low from the USA. This policy helps country’s government to increase the money supply in the economy and lower interest rate increased the borrowings and spending capacity that helps into expansion of the country’s economy (Baxa et al., 2013)
Macroeconomic outlook of Australia and the USA
Australia economic outlook seems good as per the given data. From the year 1990-2000, the GDP growth rate was good. The economy was growing in these years. After the year 2000-2010, there were some obstacles in growth due to high unemployment rates and interest rates. As the economy was stagnant at that time due to poor governmental policies and plans, soon after the year 2000-2015, there was a moderate growth in the economy (Sheehan and Gregory, 2013). At the same time, Inflation and unemployment are also reduced at a certain level. It seems that the aggregate demand meets the supply factors. Production and consumption pattern of goods and services are maintained that is beneficial for the country’s economic growth. Data of Import and export had shown the signs of a rise in demand in the home and foreign countries. The current account deficit is improved due to increase in the level of export percentage. Similarly, import data has shown the expansion of the new market for the Australian economy due to high import rate. The Overall outlook is good and it will be better than expected, because the main macroeconomic pillars of the country i.e. real GDP, inflation, and Unemployment rate are constantly improved (IZA, 2016).
On the other hand the USA macroeconomic outlook seems also good. The GDP growth rate was 2.42% from 1990-2015 as per given data. In 2008-2009, the GDP rate was continuously negative i.e. -0.29 and -2.78.The consequently negative GDP leads to recession for the country economy. Due to the recession, the rate of unemployment was also increased at that period. The country’s economy is grown moderate after the year 2009, USA federal tightened monetary policy to curb the inflation. It will help the economy to grow in the future and it will encourage growth and more investments in the country. Unemployment data of country falls constantly after 2009 that will enhance the optimal level of production in the economy, enhance buying power and fewer government borrowings in the country (Argy, 2013). As per the study of both the countries variables, it is forecast that the Australian economy will expand soon due to improvement in their macroeconomic indicators.
From the above study, it can be concluded that the real GDP, unemployment and inflation are the three main pillars of the country’s economy. Other macroeconomic indicators i.e. interest rate, import and export percentage which is based on these three important pillars. Further, it can be concluded that the both the countries tried to achieve the macroeconomic stability in the economy. When compared to both countries economic indicators, Australia had reduced the Unemployment rates in past decade. Similarly, on the other hand, USA had tightened the monetary policy to curb the inflation rate in the past years. Finally, it can be concluded that both country’s economy maintained their real GDP in the past decade.
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