Comparing Business Cycles And Macroeconomic Issues In Australia, China, USA - Essay.

Differentiate the objectives and consequences of macroeconomic policy in Australia and debate the conflicts between the achievements of those objectives.
    · analyse economic fluctuations and Gross Domestic Product.
    · describe and discuss the concept and consequences of unemployment.
    · examine the relationship between exchange rate and international trade.
    · compare monetary policy and fiscal policy in a macroeconomics context.

1. Investigate the historical GDP growth, unemployment rate, inflation rate for each country and identify the business cycles through accessing the data of the statistical bureaus of the respective countries, the IMF database, the World Bank database, or the OECD statistics. Pay attention to the difference between real and nominal data. You should use the longest available data in this task.

2. Identify the phases of the business cycle for each country, in particular, identify the time periods oeconomics recessions for each country. Contrast your assessment with the literature. For each country, you should use at least three different sources of literature. (hints: the publications of the central bank represent usually the official view on the macro economy, the peer reviewed papers usually represent the view of the authors.)

3. Draw AD-AS model for each country separately. Carefully choose the scale of your axes. The graph should represent your assessment of the current macroeconomic state in the business cycle. It should also indicate the macroeconomic issue you identified for the respective country.

4. Discuss one of the four macroeconomic issues, which you identify as the most relevant issue in the current situation of the respective country. Contrast your assessment with the literature. Here you are required to use at least three different sources of literature.

Economic Structure of Australia, China, and USA

Australia, an economy having a mixed market economic structure is fourteenth largest economy when considered with respect to nominal GDP. The largest dominating sector of Australian economy is service sector with service sector contributing 61.1 percent of GDP. After service sector, two following important sectors are manufacturing and primary sector. China account second largest nominal GDP in world. In the last few decades, China recorded a rapid economic growth. The most productive sector of China is manufacturing (Bloch, Rafiq & Salim, 2015). USA records the largest nominal GDP and second highest per capita GDP (PPP adjusted). The report compares economic condition of Australia, China and USA in relation to phases of business cycle and major macroeconomic issues.

Business cycle or economic cycle or trade cycle is characterized in terms of gradual upswing or downswing of economic activity captured in term of long term growth trend in Gross Domestic Product. A complete business cycle consists of periods of economic expansion as well as economic trough (Heijdra, 2017). Different phases of business cycle can be explained in terms of trend in the growth of real GDP.

Figure1: GDP growth in Australia

(Source: Data.worldbank.org, 2018)

Figure 2: Unemployment rate in Australia

(Source: Data.worldbank.org, 2018)

Figure 3: Inflation rate in Australia

(Source: Data.worldbank.org, 2018)

The accounted growth in real GDP of Australia was -0.39 percent in 1991. Due to recessionary pressure during this time Australian economy grew at a negative rate. This was the slowest pace of growth in Australia ever. The slowest pace of expansion was associated with a high rate of unemployment and an associated high inflation. However, given economic resilience and fast expansion of mining and other industries economic growth recovered and Australian again experienced the phase of business cycle expansion. Steady expansion resulted in the highest growth rate of 5.02 percent in 1999 (Jorda, Schularick & Taylor, 2017).  Economic growth in the beginning of 2000s though was relatively slower however; there is no indication of recession with a prevailing average growth rate of 2 to 3 percent. Since then unemployment also declined along with price level stability.

Figure 4: GDP growth in USA

(Source: Data.worldbank.org, 2018)

Figure 5: Unemployment rate in USA

(Source: Data.worldbank.org, 2018)

Figure 6: Inflation rate in USA

(Source: Data.worldbank.org, 2018)

At the beginning of 1990s, the USA economy experienced a negative growth indicating a business cycle recession. Rate of economic growth during this time was -0.07 percent. The negative economic growth was accompanied with high unemployment rate of 6.83 percent and corresponding high rate of inflation of 4.23 percent.  Recovery of economic activity has turned the growth figures positive. The economy maintained an average growth rate of percent 33 percent until the housing crisis began. Economic growth started to be considerably slow since late 2007 (Kiani, 2016). Following global financial crisis, economic growth again became negative. Growth was a low as -0.29 percent. The recessionary shock gradually recovered and the economy recorded a rate of growth of 2.27 percent during 2017.

Phases of Business Cycle in Australia, China, and USA

Figure 7: GDP growth in China

(Source: Data.worldbank.org, 2018)

Figure 8: Unemployment rate in China

(Source: Data.worldbank.org, 2018)

Figure 9: Inflation rate in China

(Source: Data.worldbank.org, 2018)

Real GDP growth in China exceeds that of the growth rate in USA and Australia. In 1991, economic growth rate in China was 9.29 percent. China’s economy since then grew rapidly attaining a double-digit growth rate of 13.05 percent in the year 1994. The rapid economic growth causes unemployment to decline a faster pace along with a high pressure of inflation.  Growth was though relatively slower since 1995, but it was above the targeted growth rate of 7 percent (Guo,  Liu & Zhao, 2015). Since 2003, China’s economy again started to expand at a rapid pace and accounted economic growth rate of above 10 percent. The economy is now facing a recessionary threat following a significant slowdown of economic growth since 6.90 percent.

The official annual national accounting estimate in Australia started since 1938-39. During 1950s, the economy experienced a mild recession resulting from contraction of domestic production after the period of World War II (Kydland, Rupert & Sustek, 2016). Australia again experienced a recessionary pressure between 1960s and 1970s as indicated by a sharp decline in GDP figures. Economic growth however did not fall to negative. There was two consecutive period of recession during 1970s and middle of 1980s (Jorda, Schularick & Taylor, 2017). The next recession that Australia experienced was in 1991. This was a relatively longer recession as supported by unemployment rule. Manufacturing sector of Australia contracted at a faster pace. Unemployment in Australia has reached to a relatively high level. The below average growth in Australia in last few years indicate a recessionary pressure in the economy (Fenna, 2013).  Investment growth from sectors other than mining and expansion of business contribute to economic recovery.

Economic expansion in USA lasted for a comparatively longer period than contractions since the world war II. The most recent business cycle in USA lasted from 1945 to 2009 (Kiani, 2016). In the entire phase of business cycle economic expansion was lasted for the period 58 months. As compared to this, number of recession months were approximately 11. Last recession in USA began since the latter half of 2007 (Ma & Zhang, 2016). This recession, also known as global financial crisis continued for two years. The recession ended in 2009. Recession in the USA economy was the combined result of overconfidence of household and businesses and collapse of financial market (Johnson, 2014). USA economy is experiencing a phase of expansion since 2009.

Macroeconomic Issues in Australia, China, and USA

The average growth rate in China between 1998 and 2009 was 10.1 percent. The double digit growth rate of China indicates long period of economic expansion in China since 1997 (Guo, Liu & Zhao, 2015). In 2007, growth rate reached to the peak level of 14.2 percent. Large trade surplus fuels economic growth of China. China maintained a smooth balance between import and export. Weak demand in the domestic economy created a recessionary pressure during 2008 (Ding, Guariglia & Knight, 2013).  In order to boost economic growth during this time monetary stimulus was given to the economy in terms of decline in interest rate. In recent years, economic growth on China though has slowed down but the economy yet not entered a recession (Gong & Kim, 2013). Growing uncertainty worldwide and export expansion from other developing countries possesses continuous threat to the economy.

Figure 1: AD-AS for Australia’s economy

(Source: as created by Author)

Figure 2: AD-AS for USA’s economy

(Source: as created by Author)

Figure 3: AD-AS for China’s economy

(Source: as created by Author)

Unemployment rate is one of the important macroeconomic issues in the selected countries. In the last few years’ unemployment in China increased at a faster pace (Khraief et al., 2018). Unemployment refers to a condition of labor market where people despite actively searching for jobs cannot find a suitable one.  Growing unemployment now has become a major cause of concern in China, Australia and United States. Steady unemployment has a devastating effect on the economy and people’s life. Long term unemployment thus has a far reaching impact on the economy (Ghosh, De & Ghosh, 2018). The subprime mortgage crisis of USA had an adverse effect on labor market of USA.  Other than mortgage crisis, there are various other factors affecting employment and labor force of the economy. Long term unemployment is a major problem in Australia. This has adversely affected level of well-being of the economy.

Global financial crisis is characterized as a period between 2007 and 2009 when financial market worldwide experienced excessive tension. Large banks in different nations during this time suffered huge monetary losses. Government then had to give support to the financial institution to recover huge loss and escape from bankruptcy. Collapse of financial system had an economy wide impact in terms of contraction of economic activity and experienced huge recession.  The impact of global financial crisis on Australia, China and USA are summarized below.

Impact of the Global Financial Crisis on Australia, China, and USA

Australia though have a relatively steady banking and financial system, the financial disruption in 2007 still had a considerable effect on the economy. Banks in Australia have been affected largely. The impact of financial crisis on Australia is relatively less severe compare to other nations worldwide. With intensification of deep rooted crisis, Australian dollar lost its value and started to depreciate. There was an above thirty percent decline in the value of Australian dollar. The financial crisis largely impacted manufacturing sector of Australia (Bissoondoyal-Bheenick et al., 2018). The automotive sector of Australia faced huge contraction as a result of the crisis. There were huge job losses in the regional areas. Crisis in the global financial market negatively affected volume of trade. In 2009, trade volume in Australia contracted by 11.6 percent. This was the first decline in export volume of Australia since 1965 indicating vulnerability of Australia to the global economic events.

China successfully escaped from most of severe impact of global financial crisis. The economy experienced only a slight slow-down during this time. The main reason for which China remained relatively less affected from the global financial crisis is that the financial system of China is relatively closed. China however had not completely escape from global financial crisis because of its dependency on global market for export. As global financial crisis affected many of its trade partners badly, there was a large decline in international demand of China’s domestic product. Interruption in export volume hurt China’s economy badly. The financial crisis significantly lowered stock return in the financial market. Foreign direct investment in China had declined largely. In 2008, net foreign investment lowered to $121 billion in China (Hussain & Li, 2018). With stock market crash, many of the invested assets had lost its value. China’s government intervened actively to minimize the impact of global financial crisis and helped in quick recovery of the economy.

USA faced the most severe consequences of Global Financial Crisis. The crisis originally rooted in United State created an economy wide recession in USA.  The recession that began since December 2007 is known to be officially ended in the middle of 2009. The economy however took a relatively longer time to back to its previous employment and output. Following financial crisis, the economy lost approximately 8.7 million jobs in just two years span between 2008 and 2010. Between 2007 and 2009, economic activity contracted significantly resulting a decline in real GDP by 4.2 percent. The economy was undergone through the worst phase of business cycle. GDP started to recover slowly since third quarter of 2009. In 2010, unemployment was as high as 10 percent compared to 4.7 percent in 2007 (Lane & Milesi-Ferretti, 2018). The liquidity crisis as a result of financial market collapse hampered economic activity. The investment banks that previously supported by funding through overnight repo rate either merged or declared bankruptcy resulting in a financial market tension in the economy. Several policies had been undertaken by Federal Reserve to recover the crisis. Government took considerable measures to secure a steady investment in USA. This by helping financial group to access more funds contributed to economic recovery.

This part of the paper focuses on briefly summarizing the macroeconomic performance of China, USA and Australia. Performances of each of these nations are evaluated in terms of real GDP growth, unemployment and inflation. GDP growth in Australia is quite stable compared to USA and China.  Rate of unemployment has declined in a continuous pace from the highest level since 1992. Inflation rate after fluctuating for a considerably long time now has been stabilized following RBA’s inflation targeting policy. Real GDP growth in China though declined since 1992 but it recovered since 2000s and attained to the peak level between 2006 and 2007. Unemployment rate has revealed a continuous declining trend in China. Inflation in recent though has stabilized but it was considerably higher during 1990s. After economic recession in 1991, economic growth in USA recovered and began to increase steadily. The economy again faced a huge recessionary shock during financial crisis of 2008. Unemployment rate increased significantly during this time and price level was highly unable. Economic however began to recover since 2009 along with a stability in unemployment and price level.

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