Real Gross Domestic Product (GDP) of Australia

Discuss About The National Asset Funds Economic Development.

Australia is a wealthy nation that increases its national income through exports of mining, telecommunications, manufacturing and banking. This country possesses a market economy with comparatively higher national income per capita than some countries worldwide (Akyol and YILDIZ 2017). Consequently, the poverty level of this country is low as well. On the other side, the United States of America (USA) has possessed a capitalist mixed economy, consisting with huge amount of natural resources and higher level of productivity. The specified economy is one of the fastest growing economies with its largest market share in world economy. As a result, the U.S Dollar is considered as the primary reserve currency worldwide (Hall and Klitgaard 2018). Hence, these two countries have significant economic importance for which analysing various macroeconomical concepts is essential. The report has also intended to focus on various economical factors of Australia and the U.S.A and has tried to analyse those as well. Those economical sectors factors are the real gross domestic growth, interest rates, consumer price index, exchange rate, unemployment rate along with exports and imports. By collecting data from 1990 to 2015-16 for both countries, the report has intended to establish various relationships among before mentioned macroeconomic factors like relationship between real GDP growth rates of Australia with its inflation rate and also with unemployment rate, for understanding their economic performances. Some other relationships, which this specified report is going to analyse, are relationship between net exports of Australia with the US.A along with their real exchange rates. Moreover, relationship between cash rates of Australia and the Federal Reserve Fund’s rates of the U.S.A has also been established within this report. After discussing entire concepts based on summary statistics, graphs and analysis with discussion, this report has focused to draw a prediction regarding macroeconomic outlook of Australia.

Real Gross Domestic Product (GDP) is a macroeconomic concept, which measures the value of economic output of an economy for a particular time, adjusted for inflation or deflation (Konchitchki and Patatoukas 2014). This value is expressed with the help of base-year prices, which is referred as constant price. The real economic growth rate of a country measures its growth rate with the help of this real GDP over the period. Inflation rate, on the other side, measures the rate at which a country’s general price levels of goods and services increases (Jatoi and Khan 2015). This consequently leads the purchasing power of this country in an opposite direction.

Relationship between Real GDP and Unemployment Rate of Australia

The real GDP growth rate at constant price of Australia is shown in the following diagram. Moreover, inflation rate of this country is also represented in the same diagram. By analysing this figure, the relationship between these two macroeconomical factors of Australia can be discussed.

Figure1: Real GDP and inflation of Australia (1990-2016)

Source: (Tradingeconomics.com, 2018)

According to figure 1, the growth trend of Australia’s inflation has fluctuated since 1990 and has started to decrease after 2010. This implies that, based on a constant price, the country’s gross domestic product has decreased. On the other side, real GDP rate of this country has increased constantly since 1990 (Tradingeconomics.com, 2018). This trend indicates that economy of Australia has grown steadily over the year and consequently, the value of nominal gross domestic product of this concerned country has also increased sharply. This further implies that the unemployment level is low and wage rate is high as demand for workers in market increase.

The unemployment rate of a country represents the share of entire workforce, who are jobless and this amount is represented in terms of percentage (Krueger et al. 2017). According to the Okun’s law, economic growth rate and unemployment rate has a negative relationship. According to this law, if the potential GDP growth rate of a country is 2%, then this GDP needs to grow above 4% rate during one year to reduce the unemployment rate by 1% (Guisinger et al. 2018). Hence, the relationship between of Australia’s real GDP and its unemployment rate can also be analysed.

To describe the relation between Australia’s real GDP growth rate or real economic growth rate with its unemployment rate, the following diagram is used. This diagram has represented growing trend of these two macroeconomical factors since 1990.

Figure 2: Real GDP and Unemployment (1990-2016)

Source: (Tradingeconomics.com, 2018)

According to figure 2, real GDP growth trend of this country has increased continuously while the unemployment rate has decreased constantly since 1990. The Okun’s Law can support this opposite relation. Due to increasing economic growth, Australia’s unemployment rate has decreased significantly and this in turn has led the country to produce more amount of output. As a result, demand for work force has increased which in turn has helped many people to obtain their jobs (Duarte, Kedong and Xuemei 2017). Moreover, due to higher demand for workers, new people remain able to find jobs in this country.

Net Export of Australia

After analysing relation between real GDP growth for Australia with its inflation rate and unemployment rate, it can be said that the country is operating under recovery period of the business cycle. At this phase, the economy experiences an upward trend of business followed by increasing trend of production, price, investment and savings (Jordà, Schularick and Taylor 2017). Consequently, unemployment rate decreases during this phase.

Net export of a country represents the difference between its total export and total import (Xiaorong, Plater and Leonardi 2018). On the other side, real exchange rate determines the ratio of price level of foreign country with its domestic one. In this context, it needs to be mentioned that the value of foreign price level is represented in terms of domestic currency to measure the required ratio. Net export of a country has possessed an important relationship with its real exchange rate. During higher rate of real exchange rate, the net export of the concerned country declines while the opposite situation occurs when real exchange rate remains at a lower level (Bordo, Choudhri, Fazio and MacDonald 2017). Higher rate of real exchange rate indicates relatively higher prices for domestic goods compare to the relative prices of goods in foreign market. Thus at higher exchange rate, exports become costlier while imports become comparatively cheap. This implies a decreasing value of next export of this domestic country on the contrary, lower exchange rates implies lower amount of relative price level at domestic markets for goods while relative price in domestic market remains high. This makes import costlier while exports become cheap. Hence, at this situation, the country experiences higher amount of net export. This concept is represented in this report between the USA and Australia.

To analyse the relationship between these two economic factors, this report has collected statistical trend since 1990 based on which further analysis can be done.

Figure 3: Exchange rate between Australia and the U.S.A

Source: (Tradingeconomics.com, 2018)

Figure 3 has represented the real exchange rate of Australia in terms of the U.S.A dollar since 1990. Based on the above trend, it can be said that the real exchange rate of Australia has increased since 2012 (Tradingeconomics.com, 2018). However, before this year, this exchange rate has remained at a lower position. From this trend represents that net export of Australia with the U.S.A has remained high before 2012. However, after 2012, the amount of net export has decreased.

Cash Rate of Australia and the Federal Reserve Fund’s Rates of the U.S.A

Figure 4: Export trend of Australia (in current U.S $)

Source: (Data.worldbank.org, 2018)

Figure 4 has represented the trend of net export of Australia since 1990. This trend has represented an overall trend of Australia’s net export with rest of the world. However, as the U.S.A is one of the largest trading partners of Australia, impact of export and import of these two countries can influence this overall trend line of Australia significantly. Figure 4 has represents that net export of Australia has increased significantly since 1990 due to its lower rate real exchange (Data.worldbank.org, 2018). However, after 2012, this trend of next export has decreased continuously. This implies that the real exchange rate of this country has become higher after this year.

Hence, figure 3 and figure 4 have successfully represented the relationship of net export and real exchange rate between Australia with the U.S.A.

Cash rate refers the bank rate of Australia. The Reserve Bank of Australia (RBA) charges this rate of interest rate on overnight loans to commercial banks. This official cash rates (OCR) allow the RBA to adjust interest rates, which apply in economy of each country (Jiang et al. 2017). Any transaction between financial institutions cannot change this OCR. This is because this transaction does not affect the money supply of the country. On the other side, transaction between the RBA and any financial institution may affect this cash rate. The Federal Reserve Funds rates, on the other side, represent the interest rate at which banks and other credit unions lend their reserve balances to other institutions related to deposits overnight, without any collateral (Berger et al.2017). The term reserve balances refer the amounts that the Federal Reserve holds to maintain reserves requirements of country’s depository institutions. Hence, this federal fund rate is considered as vital benchmark for the country’s financial market.

The relation between Cash rates of Australia can be represented with the Federal Reserve Fund’s rates of the U.S.A. the below two diagram has represented this relation properly.

Figure 6: federal funds rate

Source: (Fred.stlouisfed.org, 2018)

Figure 6 has represented the federal funds rate of the U.S.A since 1900. According to this figure, the fund rate has decreased since 1990 and it has remained at 0.5% since 2010 due to financial crisis.

Figure 7: Cash rate of Australia

Source: (Reserve Bank of Australia, 2018)

According to figure 6, it can be said that the cash rate of Australia has also decreased since 1990. Moreover, after 2010, this rate has remained below 5% (Reserve Bank of Australia, 2018). This trend is almost similar with the trend of Federal Reserve funds. Thus, from these two figures, it can be said that the funds rate has led the cash rate in a similar ways. This concept can be described as follows.

Conclusion

The U.S.A has captured an important position in world market through its large and strong economic position. Hence, the economic condition of this country can also affect the economic condition of other countries worldwide. Especially with which it has trade relation. This consequence is also true for Australia economy. Interest rate can represent the economic condition of a country. Thus, decreasing trend of federal fund rates represent that the economic condition of the U.S.A has decreased since 1990. Moreover, financial crisis has led this condition to a comparatively lower level. Consequently, world economy has also affected due this economic condition of the U.S.A. This has also affected the Australian economy where investors have affected adversely. Hence, to protect Australia’s economy, the government has decreased the cash rate since 1990. This trend has remained at a stable position between 2000 and 2012. However, due to financial crisis in world market, this trend has decreased further.

However, according to some economists, the economic condition of U.S.A has not influenced Australia directly and immediately. This is because; after 1990s, the economic cycle of Australia does not follow the same of the U.S.A. Moreover, the trade relation between Australia and the U.S.A has also changed after this year (Castelnuovo and Tran 2017). In this context, it can be mentioned that, during global financial crisis, the Reserve Bank of Australia has decreased its interest rates to manage the country’s economy for facing the impact of this crisis during large period. However, the central bank has taken this decision after some years of this crisis. As a result, it is seen that Australia’s economic condition has remained at a stronger position compare to other developed countries like the U.S.A, during this period.

In addition to this, it can also be said that, the impact of increasing rate of interest of the U.S.A has affected Australia not immediately but after some times. The chief reason behind this phenomenon is that, most of the Australian banks take loan from banks of the U.S.A to fund their business activities. Due to increasing rate of federal funds, the cost of borrowing for Australian banks has also increased and consequently, this has affected Australian customers, who have borrowed from them. Moreover, if the RBA does not increase interest rates after the increment of the one of federal funds, commercial banks of this country may increase their rates independently. They can do this to overcome their profit levels at a stable position.

In this context, it can be said that the opposite situation can also be occurred when the Fed may increase its interest rates. Increasing rate indicates a stronger economic market for the U.S.A (Karolyi and McLaren 2017). Hence, the country can perform its economic activities, like trade and investment by more amount compare to the before. Moreover, it can also increases imports from foreign market. Thus, Australia can also increase its trade relation with this country. In addition to this, Australia can get financial assistance from this country by large amount, which in turn can help it to develop its financial and economical conditions significantly.

After analysing various relations among macroeconomical factors, it can be said that Australia’s economy has experienced a recovery period since 1990. The relationships between real GDP growth rates with inflation rate and real GDP growth rates with unemployment rate have supported this concept (Holston, Laubach and Williams 2017). According to these two diagrams, economic growth trend has increased while inflation and unemployment rate have decreased. Moreover, due to higher exchange rate of Australia, the country’s net export with the U.S.A has also decreased after 2010. The global financial crisis has played an important part to decrease this trend. Hence, the economic condition of Australia has remained poor during 1990 to 2016. However, based on present rate of federal funds, it can be seen that the U.S.A is increasing its economic condition and this can further help Australia to improve its economic condition as well. As a result, Australia can recover itself from recovery period and can experience an expansionary phase in coming future.

Conclusion:

After the entire discussion, it can be concluded that the economic condition and performance of Australia can be observed with the help of some data and diagrammatical representations. Through discussing the relationship between real GDP and inflation rate of Australia along with unemployment rate, this report has obtained the economical performance of Australia. On the other side, by observing the Federal funds rate, this report has also stated the economic condition of the U.S.A. in addition to this, by analysing entire macroeconomical factors, it can be said that Australia is going to experience expansion within its business cycle.

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