Trade Relation of the Country

1 ECONOMICS ASSIGNMENT 2 Contents Introduction ................................................................................................................................ 3 Current macroeconomic indicators and impacts ........................................................................ 3 Current macroeconomic performance of the US ....................................................................... 3 Current macroeconomic performance of Singapore .................................................................. 4 Current macroeconomic performance of Australia ................................................................... 5 Real interest rate differentials and relative growth rates ........................................................... 6 Changes on the exchange rate of currency ................................................................................ 8 Spill over using IS-LM model ................................................................................................... 9 Other theories in relation to the context .................................................................................. 10 Conclusion ............................................................................................................................... 11 Reference ................................................................................................................................. 13 3 Introduction Repercussions of acountry ’spolicies in other countries of the world are acommonplace in the wake of globalisation. Each and every economies of the world is currently connected to each other. Therefore policies in one country impact the macroeconomic performance of the other countries of the world. The USA is one of the largest countries in the world in terms of the nominal GDP and per capita GDP. The trade relation of the country is also vast with different countries of the world. Therefore anumber of countries of the world depend on the economic performance of the USA. Two such countries are Singapore and Australia which has consolidated trade relationship with the USA. Due to the corona virus pandemic, economies of all around the world has faced downturn. The USA was no exception to this and this led to arise in the unemployment in the economy. Therefore, policymakers of the country have introduced some changes in the monetary and fiscal policies of the country. The objective of this paper is to discuss the impact that the monetary and fiscal changes of the USA will have on the macroeconomic performance of Singapore and Australia. Current macroeconomic indicators and impacts Current macroeconomic performance of the US The economy of the USA has been affected by the outbreak of the virus and hence the economic growth has been reduced. The GDP growth rate of the economy became -33.1% during the second quarter of 2020 (Magnus, 2020) .This has been the largest reduction in the GDP of any country due to the impact of the corona virus. The main stimulant to have worked here is the reduction in the consumption expenditure. Due to the pandemic, there were many lockdowns in different parts of the country. Therefore the people lost their jobs all across the country and hence the median income of the country during this time plummeted. This led to the reduction in the consumption spending that further led to the reduction if the GDP. Furthermore the current account balance of the country reduced significantly as well. The current account balance of the economy was already reducing since 2016; it reduced further due to the pandemic. According to the second quarter of 2020, the current account balance of the country stands at -480.6 Billion USD (Kwak, 2021) .This can be due to the fact that the country was importing most of the essential products from other countries of the world while US export demand reduced significantly. Furthermore the investment into the economy also fell down due to the outbreak of the pandemic. The outbreak of the pandemic reduced the confidence of the investors of both the domestic market and the foreign market. 4 This has also led to the reduction in the economic growth rate of the country during the outbreak of the pandemic (DaDalt and Park, 2020) .Another reason for the reduction in the investment inflow is the fall in the interest rate that was regulated from the side of the government. Figure 1: The GDP of the USA over the year (Source: Karkee, 2020 ) Current macroeconomic performance of Singapore Similar to the most countries of the world, the economic growth rate of Singapore also reduced due to the outbreak of the pandemic. The GDP of the nation was contracted by 13.3% which is agreat concern for the policymakers of the country. The GDP growth rate on year on year basis before the pandemic was not very high for this country. Therefore a sudden and a massive fall in the GDP growth rate in the country has led to a rise in the unemployment rate. According to the November of 2020, the unemployment rate was 4.7 which is an increase from 3.3% in the November last year (Herbst, McMillan and Ziadat, 2021) .The private organisations around the economy are reducing their workforce in order to cut the cost of operation. This has resulted in a fall in the income of a huge mass of population and hence the aggregate demand for the goods and the services has fallen. Since the current account balance of the country was one of the best in the world in the pre-covid situation, it has not been affected by the pandemic much compared to the other countries of the world. The current account balance of the country as per the data of July 2020 is 43.46 Billion USD. While most of the countries reported anegative current account balance, this country only experienced a 17% shrink in the export demand (Rose, 2020) .One of the 5 greatest advantages of this country in the wake of the pandemic is that it had exported most of the essential products to many countries of the world including the USA. Figure 2: The GDP of the Singapore over the year (Source: Choluj, Gerard and May, 2020 ) Current macroeconomic performance of Australia Australia is among the few developed countries of the world which experienced only slight reduction in the GDP growth rate. The July quarter of 2020 showed that the GDP of the country shrunk -7%. This is less than most of the other developed countries of the world. This can be due to the fact that the health sector of the economy has been able to absorb ahuge rise in the Covid cases in the country. It also needs to be noted, that in avery short time the country also experienced apositive economic growth rate in the next quarter. Australia was one of the first economies of the world which reported positive economic growth in the last quarter of 2020 (Forhad and Alam, 2021) .This impressive performance of the country in the later phases of the pandemic can be attributed to the stimulus package of the government. The interest rates have been lowered in the country in order to increase the cash in hand of the customers. Therefore the aggregate demand for the goods and the services has increased leading to arise in the economic growth rate. Furthermore the jobseekers subsidy has also been implemented by the government in an efficient manner during the pandemic. This has resulted in afewer job loss which is paying its dividend now. The current account balance of the country deteriorated from the level of 2019. In the year 2019 the current account balance was 46.98 Billion USD, an impressive improvement in the sector (Portera, 2020) .However, 6 due to the outbreak of the pandemic the current account balance reduced to negative again. This can be due to the reduction in the export demand from the countries in the Asia pacific. Figure 3: The GDP of Australia over the years (Source: Geo-Jaja and Zajda, 2020) Real interest rate differentials and relative growth rates Interest rate differential in different countries of the world plays an important role in supporting the value of the respective currencies. Subsequently the demand for the export and import changes which further leads to a rise in the relative economic growth rate. The decision of the buyers and the investors to invest in domestic or foreign market depends on the inter-temporal model of current account. The current real interest rate in the USA is 2.4% which is areduction from 3.5% in the last year (Jordan, 2020) .This has been reduced under the policies of the government to boost the economic activities of the country. On the other hand the real interest rate in Singapore is 5.2% even after the impact due to the pandemic. The interest rate differential in this case is 1.7%. This can make the customers in the USA to invest in the currency of Singapore. However, Singapore exchange rate market has been volatile in the past couple of years. Furthermore the rate of inflation rate is more in Singapore compared to the USA. Therefore, the nominal interest rate is bound be more in case of Singapore. Therefore the real interest rate differential is way less than the nominal calculation and hence this can influence the decision of the investors in the country. Therefore the decision maker using the inter-temporal model for the decision making may have refrained from investing in Singapore (Arreola Hernandez, Kang and Yoon, 2020) .On 7 the other hand investors in Singapore has not incentive to invest This way the economic growth rate of the economies have been balanced over the year before and after the pandemic. The real interest differential also remains as the real interest rate of Australia is 1.65%. Therefore the investors in Australia may become more likely to invest their money in the Singaporean currency or even in the US currency. Since US currency is more stable historically than the Singaporean currency there is a chance of investment inflow into the USA. Figure 4: The interest rate differential among the economies (Source: Dwivedi, 2020 ) The inter-temporal model of current account says that the investors measure the rate of return of investing in present domestic rate to future rate of foreign. The strategy that provides better gain is the one desirable by the investors. If there is ahigher demand for the currency of any country, the value of that currency will increase and hence more investment inflow will occur. The economic reduction of the USA could have been more catastrophic had there been no investment inflow due to the real interest rate differential. Australia has been amajor country to invest in the currency of the USA (Davidson, 2020) .The expected inflation level is another important factor that helps in the decision making. For example, the financial packages introduced by Singapore and Australia were much earlier than the USA and hence investors 8 would have expected the inflation of the economy to be low in the initial stage of recovery. The Singapore and Australia introduced financial packages of vast size and it was expected that the inflation rate in these counters will shoot up soon. Changes on the exchange rate of currency If the US government now changes some of the tools of monetary and financial policies, there should be some changes in the economies of other parts of the world. Singapore and Australia is also expected to feel the consequence of an expansionary monetary policy of the USA. First and the foremost change that will be seen are in terms of the value of the currency of Singaporean and Australian dollar. The USA imports around 3.6 Billion USD worth of goods and services from Singapore and around 11.8 Billion USD worth of goods and services from the Australia (Davidson, 2020) .Therefore if expansionary monetary and fiscal policies are adopted in the country of the US for better economic performance post pandemic, it will increase the demand for the goods and the services produced in these two countries. The importers in the USA will demand more goods and the services from Australia and Singapore and hence demand for currencies in these countries will increase. Since the supply of currency is fixed in the short term the value of both the Singaporean and Australia dollar will increase compare to the US dollar. The exchange rate mechanism in Singapore and Australia are different from each other and hence itis expected that the policies of the USA will impact the exchange market differently. Australia has afloating exchange rate which means the value of the currency simply depends on the demand and supply of the currency in the international market. Therefore due to the rise in the import from the USA, the value of the Australian dollar will increase. This can further influence the current account balance of the country. Since, the Australian dollar will appreciate due to the policies of the USA; the export in other countries of the world will also get costlier. Asia pacific which has been an important market for Australia may keep their demand for import low even after the pandemic and hence Australia may not realise a sustained high economic growth in the future. On the other hand the appreciation of the Australian currency will actually make the US currency cheaper and hence the current account balance of the US may improve post pandemic. Another positive side that can be experienced by Australia is huge inflow of investment into the economy. Therefore despite a fall in the export volume, this can actually make the domestic economy stable for the country. 9 Singaporean exchange rate regime influences the economy in a different way. The government policies of the country are pegged to its exchange rate rather than the interest rate unlike most developed countries of the world. Therefore while the value of the Singaporean currency may increase due to the expansionary policies of the USA, it may not reflect in the domestic economy and the demand within the country. Thus, the economic growth rate may not increase due to the rise in the value of the currency. Rather the rise in the currency may reduce the demand for the products of Singapore in the long run. Therefore, the current account balance of the country which is steadier compared to the other developed countries of the world may deteriorate in the long run. More over due to the high inflation rate within the economy of Singapore the appreciation of currency may not bring along a rise in the investment inflow in the recent future. Therefore, the expansionary policy used by the USA, May positively impacts the economy of Australia and may not positively impact the economy of Singapore. Spill over using IS-LM model The spill over effect of the US policy can be shown using the IS-LM model of the macroeconomic literature. The concept studies the goods and the money market separately and understands the equilibrium which occurs at the intersection of the IS and LM curve. Due to the implementation of expansionary monetary and fiscal policies of the US, the first and the foremost impact will be on the exchange rate of Singapore and Australia. Therefore the net export will reduce (Davidson, 2020) .Net export which is an important component of the aggregate demand will reduce the aggregate demand in the economies. Apart from that, due to the policy of the economy, the investment within the economy of Singapore will increase. Therefore the investment component of the aggregate demand will rise shifting the aggregate demand curve to the right side (Magnus, 2020) .That means at the ongoing level of interest the investment will increase in the economy of Singapore. It needs to be noted that the rise in the investment here will overpower the fall in the export and hence the aggregate demand for the goods and the services will increase. That means the IS curve will shift to the right side which shows that at each level of interest rate of the Singaporean economy, the aggregate demand in the economy increases (Arreola Hernandez, Kang and Yoon, 2020) .Furthermore, there will also be some changes in the money market as well. Due to the expansionary policy of the USA, the investment inflation into the country of Singapore will increase and hence lead to arise in the supply of loanable fund. Therefore the supply of money will increase in the money market of the country. Therefore, the real interest rate will reduce through the 10 interaction of the money supply and demand in the economy. Therefore at any given interest rate, the supply of money in the economy will rise. This will lead to the right ward shift in the LM curve as well. That means the liquidity of money in the country of Singapore will increase due to the policies of the USA. This will result in ahigher output for the economy in the future with ambiguous impact on the price level of the economy. The spill over effects on Australia will be somewhat different from that of Singapore. Due to the expansionary monetary and fiscal policies of the US government, the import of Australia will increase more than the increase in the export. Therefore the next export of the country will fall lead to afall in the aggregate demand for the goods and the services in the Australian market. The Australian demand for the export may rise from the side of the USA that will eventually increase the exchange value of the Australian dollar (Magnus, 2020) .Therefore the demand from the Asian market will reduce. Since the Asian market has been a major market of Australia this reduction due to the rise in the exchange rate can reduce the aggregate demand for the goods and the services in the economy. Therefore at any level of interest rate, the aggregate demand for the goods and the services will reduce leading to aleft ward shift in the IS curve. On the other hand the money market will also experience some changes. Due to the financial easing in the USA, the investment into the USA will increase and some of the international investors might find itattractive to invest in the USA more than Australia. This will reduce the investment inflow into the country and hence the supply of money may reduce. This will lead to aleftward shift in the LM curve (Arreola Hernandez, Kang and Yoon, 2020) .The equilibrium in this case can be at apoint where the interest rate is increased and the output of the economy is reduced. Therefore due to the financial easing in the USA, there can be some negative impacts on the economy of Australia in the coming years. Other theories in relation to the context One of the other theories that can also justify the changes in the economies of Singapore and Australia is Swan diagram. This is a diagram where the horizontal axis measures the real expenditure done in the economy and the vertical axis shows the cost ratio. There is an internal balance curve which is downward sloping and an external balance curve which is upward sloping. Now due to the expansionary monetary policies of the USA, there can be changes in the internal and the external balance of Singapore. In this case the downward sloping internal balance of the country will improve and hence the curve will shift to the right 11 side. Furthermore the external balance of the economy will increase since the net export of the economy will increase (Arreola Hernandez, Kang and Yoon, 2020) .Therefore the mutual intersection will happen at apoint where the internal balance and external balance meets each other. This point will show areduced unemployment, however, the impact on the price level cannot be estimated with this concept. Therefore the real expenditure of the economy will raise leading to afurther fall in the unemployment of the economy. Australia on the other hand will experience different ripple effects due to the expansionary monetary policies of the USA. In the case of Australia, the external balance curve will shift to the left side as the demand for the export of Australia will reduce. Therefore at each price level the external balance of the country will reduce and the curve will shift to the left side. On the other hand the internal demand for the goods and the services will also reduce and hence the internal economy will also see a lack of full employment in the economy. Furthermore, the investment inflow into the economy will also reduce and hence there may be arise in the unemployment rate which is also shown by the swan diagram for Australia (Magnus, 2020) .Therefore there will be leftward shift in both the curve and hence the capital expenditure will certainly reduce in the economy due to the expansionary monetary policies of the USA. The changes in the price level cannot be predicted as the changes in the price of goods and services depend on the percentage change in the internal and the external balance of the country. Conclusion Therefore the paper has stated that the policies of USA will have different reaction on the different countries of the world. While the expansionary monetary policies will help in the rebounding of Singaporean economy, it may negatively impact in case of Australia. The current balance of payment of none of the countries except Singapore is positive. That means Singapore has been able to export goods and the services more than it has imported. The current account balance of the USA has also deteriorated over the years and pandemic has worsened the situation for the country. The Australian economy was having ahealthy current account balance; however the slump in the macroeconomic performance of the countries in the Asia pacific may create aproblem for the economy. Furthermore the paper also states that the real interest rate differential among the countries can develop the flow of the credit flow across the economy. The investors do keep in mind the inter-temporal model of the future income and hence take the decision based on that. 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