Essay: Micro & Macro In Relation To Australian Economy.

Microeconomics

Discuss About The Report Is Concerned With Microeconomics?

This report is concerned with microeconomics and macroeconomics in relation to Australian economy and how the factors of these two affect the economy. Microeconomics includes the internal factors that affect organizations such as efficient utilization of resources, opportunity cost, decision-making, identifying the ways, which leads to effective production, grievance handling etc. On the other hand, macroeconomics means the external factors which are outside the organization and that affect the organization such as changes in demand, change in the prices, increases or decrease in net exports, inflation, changes in government policies etc.

Concept of Opportunity Cost

Every person has a choice. He or she invests in something by properly analysing the advantages and disadvantages of that particular product. Opportunity cost refers to the loss made to an individual by the rejected choice in order to gain advantage from the alternative choice. For example: If one chooses to stay in the class and study rather than going out for bunk with your friends, so in this case opportunity cost is not having fun with friends by bunking the class (Parkin and Bade, 2015). Countries are bound to make a choice between the production of a particular good or service and the production of another. For example: in case of Australian economy, government has planned to allocate resources towards defence. So, in this case, these resources cannot be utilized in the healthcare, education, childcare or public transports. So here for Australian economy, the opportunity cost is non-allocation of these resources to healthcare and education. Whenever there are situations, when we have to make choices between alternative types of production, then opportunity cost arises (Campbell and Brown, 2015).    

The growth of an economy depends upon how efficiently that economy is using its resources. If we are making excess use of imported goods, then it will result in hurdles in maintaining equilibrium in the country’s expenditure and its revenue. Australia’s imports are crude petroleum, refined petroleum, cars, packaged medicaments, meat etc. Its exported goods are gold, coal, wheat etc. Australia is importing goods from Japan, China, The United States and Thailand.

If the companies in Australia are not making the use of limited resources properly, then it leads to increase in cost of production. So it will arise a challenge for the companies in Australia that how they will compensate this increased cost of production. Australia is considered as the biggest user of natural resources. Australian economy is consuming more resources per person as compared to Japan or United States. For example, India’s natural resources consumption is 5 tonnes per person and US and Japan’s resource consumption is about 28 tonnes still Australian economy is consuming more. Efficient and effective utilization of resources takes the economy towards sustainability.

Concept of Opportunity Cost

In Australian economy, the decision marker is the market. Three economic decisions that depends upon the market are what to produce, how to produce and for whom to produce. In Australian economy, the production can be done according to the resources available in the market. Each product is produced not according to its demand but as per the resources available in the market. Then they will focus on how to produce. In how to produce, the market helps in deciding what type of technology and resources needs to be used in the production of goods. For whom to produce includes how the economy divides the goods and services among the people living in the society.

This division depends upon the economic contribution of an individual in the market. The market system of Australian economy affects these three economic decisions in following way:

The above blogs have discussed opportunity cost for the Australian economy, effective utilization of resources in context of Australian economy and how the market is the decision-maker in case of Australian economy. Australian economy showed a growth in the recent years by reducing the unemployment rates, low interest rates, changes in the tax rates to encourage growth. Australian economy is upgrading innovation in the productivity through R&D policies (OECD, 2017). The suggestions for Australian economy are minimizing the utilization of natural resources, maintaining equilibrium in the market prices and it is only possible when raw material can be available to the producers easily. If a country wants to grow then its main objective is to make the best possible use of its available resources. It also lowers the impact of opportunity cost on an economy.

An important part of Australian economy is that it is decision-maker is the market. But in case of scarcity of resources, it becomes a disadvantage, because the economy is focussing on aggregate demand and supply. If the resources are properly utilised, then it will avoid the problem of scarcity and the economy is able to produce any particular type of product according to consumer’s demand. It leads to equilibrium in demand and supply and hence it is feasible for the economy to choose the best alternative among all the choices without thinking about the opportunity cost (The guardian, 2017). Australian economy is required to minimize its natural resources consumption to remove the tag of biggest resource consumer. Efficient allocation can only be possible if government can interfere in the market operations by making policies for smooth running and by removing policies that creates hurdles in the operations of an economy. Australian government imposes tariffs on imported goods but because of this imposition the Australian firms that are profitable are not efficient as compared to international firms dealing with same product.

Efficient utilization of resources

Monetary and fiscal policy

Reserve bank is responsible for the monetary policy of Australia. The primary objective of monetary policy is to manage the money supply of an economy. Monetary policy tools with RBI are:  First is Repo rate and reverse repo rate: Repo rate is the rate at which clients borrow money from RBI. Reverse repo rate is the rate at which RBI borrows money from commercial banks (Wang, Li, Gupta, Su and Liu, 2017). At present, these rates are 6.75% and 6.25% respectively. Second is Cash Reserve Ratio (CRR): CRR is a certain percentage of a bank’s total deposits that is compulsorily required to be deposited with RBI. Current CRR is 4%. Third is Statutory Liquidity Ratio (SLR): SLR refers to the percentage of bank’s deposits that they are compulsorily required to invest in government securities. Current SLR is 21.5% (Kent, 2017). Fourth is Bank rate: Bank rate is the rate charged by RBI on loans and advances to commercial banks. Current bank rate is 8.25%. Fifth is Open market operations: An open market operation refers to the buying and selling of government securities by RBI.

Fiscal policy is the policy that is used to control inflation and government expenditure. The main objective of fiscal policy is to maintain equilibrium in balance of payments (BOP). Balance of payment is a record of country’s transactions with rest of the world. Fiscal policy aims at controlling inflation by attracting exports and reducing imports (Tan, 2016). There are two types of fiscal policy:

1. Expansionary fiscal policy: Expansionary fiscal policy refers to the policy in which government is spending more than the revenue from taxes.
2. Contractionary fiscal policy: This situation arises when government spending is less than the revenue from taxes (Bashar, Bhattacharya and Wohar, 2017).

Inflation means increases in the prices of products year by year. Inflation can be measured in three ways: 1. Consumer Price Index (CPI): CPI compares the prices of commodities in the base year with current year. It measures retail market prices. 2. Producer price index (PPI): It measures the change in the selling price received by the producers for their outputs over a period of time. 3. GDP deflator: GDP deflator is the most commonly used technique to measure inflation. But RBI and Government do not prefer to use this because it evaluates data on quarterly basis (Cornish, 2017).

 Types of inflation as per Australian economy are: 1. Demand–pull inflation: Demand-pull inflation arises when demand for goods increases than its supply. When supply of goods decreases in the market with increase in demand, it will automatically increase the prices of that particular product. 2. Cost-push inflation: It means when the cost of production of the company increases so the company will compensate this increased cost by increasing the prices of the product. 3. Wage-push inflation: It is a combination of demand-pull and cost-push inflation. If the wages of employees increases then it means the cost of employees to company increases and the company is going to balance it by increasing the prices (Argy and Nevile, 2016).

Market is the decision-maker

Gross domestic product evaluates the performance of an economy. GDP takes into account the total value of all the goods and services produced within the country in a year. GDP can be measured by the formulae given below:

GDP= C+I+G+(X-M)     where, C- Personal consumption expenditure

                                I- Business Investment

                               G- Government spending

                              X-M- Exports minus imports

GDP compares the current performance of an economy with previous year. The growth of an economy can be assumed by its GDP rate. Increase in gross domestic product means reduced unemployment, increase in wages, equal demand and supply of goods. Lower GDP indicates recession in an economy. GDP in Australia is 2.9% in 2016.

It is analysed that Australia’s economic system is a mixed economic system. Above we have discussed about three major parts of macroeconomics i.e. monetary and fiscal policy, inflation and GDP. These are the three major things on which every economy needs to focus. It is analysed that fiscal policies objective is to ensure economic growth and it is possible through proper mobilization of financial resources. Fiscal policy helps in equality of income by levying higher taxes on rich people and lower tax on people having less income (FOCUSECONOMICS, 2017). The government mobilises financial resources by the way of direct and indirect taxes. Government is also offering concession in excise duty on the goods produced within the country to attract foreign investors to invest domestically.

Fiscal policy is directly related to the economic growth of a country. If we talk about GDP then GDP has a great effect on stock prices. For example: If gross domestic product is less as compared to previous year then it means that the companies are earning less which lowers the stock prices. Now-a-days investors are investing by properly examining the GDP of a country. In case of inflation, it is analysed that inflation reduces the purchasing power of consumers. If the prices of goods increase then it will reduce the money value of consumers. Increase in VAT or service tax also leads to inflation. Australian economy is an economy that has navigated over 25 years without recession. These three factors as discussed in the report are inter-related to each other (Behlul et al., 2017). If inflation occurs in an economy then it will create disequilibrium in the economy so it will result in financial crises in the economy and financial crises lowers GDP of an economy. Australian economy is growing year by year and it can be seen by the way of its net savings plus other changes in the real net wealth per capita which is growing year by year. Australia’s per capita GDP is higher than Canada, UK, Germany and France.

References

Argy, V.E. and Nevile, J. (2016) Inflation and Unemployment: Theory, Experience and Policy Making.  UK: Routledge.

Bashar, O.H., Bhattacharya, P.S. and Wohar, M.E. (2017) The cyclicality of fiscal policy: New evidence from unobserved components approach. Journal of Macroeconomics. 53, pp. 222-234.

Behlul, T., Panagiotelis, A., Athanasopoulos, G., Hyndman, R.J. and Vahid, F. (2017) The Australian Macro Database: An online resource for macroeconomic research in Australia.

Campbell, F. and Brown, P.C. (2015) Cost-Benefit Analysis: Financial And Economic Appraisal Using Spreadsheets. UK: Routledge.

Cornish, S. (2017) Inflation and the Making of Australian Macroeconomic Policy, 1945–85, by Michael Beggs (Palgrave Macmillan, Basingstoke, 2015), pp. xii+ 325. Economic Record, 93(300), pp. 174-176.

FOCUSECONOMICS (2017) Australia Economic Outlook.[Online]. Available at: https://www.focus-economics.com/countries/australia (Assessed: 29^th August 2017).

Kent, C. (2017) Uncertainty and Monetary Policy Australian Economic Review, 50(1), pp. 85-88.

OECD (2017) Economic Survey of Australia 2017.[Online]. Available at: https://www.oecd.org/australia/economic-survey-australia.htm (Assessed: 29^th August  2017).

Parkin, Michael and Bade, Robin. (2015) Microeconomics: Australia in the Global Economy. Australia: Pearson Education.

Tan, Kim. (2016) Fiscal Policy in Dynamic Economies. UK: Routledge.

The guardian (2017) Australian economy.[Online]. Available at: https://www.theguardian.com/business/australia-economy (Assessed: 29^th August 2017).

Wang, L., Li, B., Gupta, R., Su, J.J. and Liu, B. (2017) Return Predictability in Australian Managed Funds. International Journal of Business and Economics, 16(1), pp.