Free Inflation, Unemployment and Growth Essay Sample
The economy of Australia has been one of the most successful in the recent years. It accounts for about one per cent of the world's total GDP. According to Gordon (2009), Australia has had nearly two decades of nothing but sound economic growth. Its interest rates have been sliced into half. The unemployment rate has kept on falling to its lowest and inflation has been kept on the minimum. In 2009, the GDP per head in Australia was estimated to be around US $ 29000 (Gordon 2009). Since the year 1970, Australia's macroeconomic policy has been majorly directed towards controlling inflation. The Australian government believed that it could achieve this goal through macroeconomic stability and growth. The inflation objective was mainly aimed at maintaining an average rate of increase in consumer prices. Consequently, it was projected that this would create more employment opportunities for the people and increase trade and investment. Nevertheless, after the Financial Crisis that affected the whole world, emphasis on macroeconomic policy has shifted to trying to avoid a recession. Many mainstream economists believe that recessions are a result of inadequate aggregate demand in an economy (Gordon 2009). This paper focuses on the way macroeconomic policy has been primarily directed towards controlling inflation with the view that success in achieving this target would be associated with macroeconomic stability and growth in Australia. It also focuses on the way Australia has emphasized on macroeconomic policy in trying to avoid a recession, following the global financial crisis. Finally, the paper contrasts these two phases of policy and explains how macroeconomic policy objectives, targets and instruments have differed.
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Many economists nowadays advocate for the use of an expansionary macroeconomic policy during difficult times of recession. On the other hand, monetarists advocate for the use of an expanded monetary policy to curb recession. On their part, Keynesian economists believe that governments should increase their spending in order to ignite economic growth. These are some of the measures that the Australian government has applied in dealing with recession. Keynesians argue that increased government spending should definitely work when monetary policy fails (Garnett 2008).
Aulich (2005) asserts that economic outcomes within 1980s and 1990s were not that good for Australia. It is perhaps imperative to note that Australia is not a big country like the United States of America. Within those years, there were very high rates of unemployment in Australia. In addition, very slow economic growth was being experienced. Nevertheless, it was such a good thing that Australia's inflation fell down to negligible levels. The whole world was also experiencing very slow growth and high rates of unemployment at that time, and lower inflation rates towards the end of that period. The Australian government of that time tried to apply a monetary and fiscal policy on the economy so as to speed up its growth. One thing that was established was that the Australian economy depended so much on the global economy. Whatever measures they had taken to improve their economy were only stimulated when the world's economy expanded (Otto 2007).
After the recession, things had to change. The monetary policy was eased and government spending increased. However, it is important to note that higher budget deficits only increased interest rates in Australia. Indeed, the recovery of the world economy will take place over a long period of time. As such, the easing of monetary policy does not coincide with the world's economic recovery which is essentially very sharp. However, the monetary policy will eventually turn out to be very supportive (Gordon 2009). Inflation will not become a problem in countries like Australia during the periods of high growth. A significant change has been made by Australia ever since it opened up its territory to international trade. During the late 1970s, Australia was only trading with countries such as the United States, Europe and Japan. Nevertheless, the recent years have seen China and East Asia emerging as important players in Australia's economy. United States of America, Europe and Japan still remain important partners in Australia's economy though.
The most recent documented rate of unemployment in Australia has been reported to be constant at 5 per cent according to the Australian Bureau of Statistics. The recent years of economic growth in Australia have witnessed employment rates increasing tremendously. This rise has been driven by the increase in full time employment and a decrease in part time jobs. The ABS reported that the participation rate increased to 65 per cent in the month of September (Gordon 2009). Major macroeconomic aggregates in the economy of Australia can be determined and compared. First and foremost, the growth in non-farm GDP can be analyzed since farm GDP tends to be volatile sometimes. Farm GDP is vulnerable to disasters such as droughts and floods. In a couple of earlier years, Australia had experienced a rapid growth until 1974 when the economy encountered unpleasant circumstances. The years between 1975 and 1979 experienced an average growth, a percentage lower than the years between 1971 and 1974 (Marzouk 1990). This current decade has seen Australia's economy experience a growth rate of two point four per cent. Statistics also indicate that in the recent years, growth has been relatively stable throughout. The following graph show the levels of unemployment in Australia compared to the United States, UK and Japan as of August 2010.
The weak growth of the economy on the latter period of 1970s was due to the increase in unemployment. In 1970, the economy was as low as 2 per cent (Sachs 1993). It then rose to 5 per cent in the recession of mid 1970s before going up in the subsequent years. Government policy and high unemployment rate was to be blamed for that phenomenon. The trend in Australia's unemployment has been on the down low ever since. This has been brought about by the changes in the arrangement of labor market over the past two decades. It is to be noted that before 1960, Australia was described as a low inflation country, but things have now changed. Australia is now a role model despite the fact that it is a small country.
The recent global financial crisis has made Australia's commodity export prices to go up. The global financial crisis has clearly explained the need for having a sound macroeconomic policy framework. The strong economy of Australia has been proved right by the fact that it has been able to withstand a drought, the housing boom and the Asian financial and economic crisis. Since 1991, the Australian economy has grown by three point three per cent every year. The GDP in 2007 was approximately $1 trillion. Unemployment rates dropped from 11 per cent fifteen years ago to five point one percent in 2008. This is obviously the lowest level ever experienced. Between 1995 and 1996, Australia witnessed a GDP of about $95.8 which translated to a surplus that was used to clear government debts. Government debt was finally cleared 2006 (Garnett 2008). The following graph depicts Australia's GDP and real net national disposable income as at June 2010.
According to Marzouk (1990), macroeconomic policies can be divided into four; monetary, fiscal, exchange rate and wages policies. Australia has continued to implement structural and policy reforms since 1970. Right now it provides a good environment for business and investment. It has over time cut protectionist tariffs, deregulated the financial market, introduced domestic competition and also secured its macroeconomic policies. Australia has done away with barriers that limited trade and investment and this has led to competition in its economy.
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Many governments usually use macroeconomic policies in trying to meet their particular objectives, and in trying to improve the performance of their economies. Policy targets which they use normally include exchange rates, money supply, GDP growth and budget deficit. Policy instruments on the other hand are other major options that governments can use to manage their economies. They include monetary policy, fiscal policy, supply-side policy, and exchange controls. Policy goals refer to the final aims, challenges and objectives of a macroeconomic policy. They include stabilization of prices, high employment rate, sustained growth, enhancement of living standards, a reduction in poverty levels and high productivity (Aulich 2005).
Fiscal policy deals with changes in the composition of government spending, taxation and borrowing. These factors and many others influence economic activity and level of employment within a given country. Monetary targets are variables that a government can seek; they are values that can be desired. They are the goals of macroeconomic policy. According to Otto (2007), macroeconomic policies basically involve the measures that are taken to influence the levels of employment, output, income distribution, inflation, exchange rate and balance of payments within a given economy. These targets are affected by using policy instruments. The two commonly used intermediate targets of monetary policy are interest rate and money supply. Australia's notable economic performance has been experienced due to the application of macroeconomic policies which are sound and effective. Structural reforms were also used which reinforced trade liberalization.
According to Gordon (2009), the real growth of GDP in Australia has been fuelled by domestic demand. Domestic demand remained stronger up to 2001 when it was slightly affected by global economic slowdown. The country has since then remained dependent on exports of commodity and manufactured imports. Australia has from time to time implemented trade reforms to improve its economic efficiency. These reforms were implemented together with the implementation of Australia's WTO commitments. This was of course in line with domestic policy goals. Nevertheless, government assistance that used to be given to the sectors of agriculture, forestry, fisheries and livestock have been lowered since 1998. For example, total support to the agricultural sector has only amounted to about 0.3% of GDP (Gordon 2009). The following graph indicates Australia's export shares with selected countries and country groups.