Microeconomic Issues and Their Impacts and Responses

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Summary
The retail sector has a major role in the growth of the Australian economy and is the barometer of the economic health of Australia's future growth prospects. When the economy is thriving so does the retail industry within an economy – thus, the level of demand within the retail industry has a significant impact on other industries as the money within the retail industry goes in a circle complementing the growth of the other industries. The performance of the retail industry is a strong indication for the government as to what monetary policies to implement in order to determine the amount of money floating around within the economy. It has been observed before that strong performance from the retail industry is translated into more jobs being created which in turn indicates a sustainable economic growth.

The Retail Sector
The Declining profitability in the retailing sector is a major concern for the Australian economy. This sector is the largest source of employment and is the largest contributor to the GDP of Australia. The reasons for this drop in profitability is attributed mainly due to the major factors like weak consumer demand, rising interest rates, strong Australian dollar and the growth of online shopping. The retail industry is a significant contributor to the Australian economy, representing 4.1 per cent of GDP and 10.7 per cent of employment. According to chart 1 from the appendix, the growth rate of the retail industry in recent years has considerably slowed down and has contributed less to the GDP of the Australian economy whilst comparing it with other sectors. While short-term or cyclical factors have contributed to this slowdown, the growth of retail sales has experienced a long-term slowdown due to changes in consumer buying habits. Further, while there has been price deflation in some sub-categories of retail, overall, sales volumes have continued to diminish. There has been a growing trend of online shopping from other countries due to the competitive prices which is the result of the strong Australian dollar where the consumer has an advantage as well as a greater choice when selecting ones product online as there is a limitation of product range owing to the import regulations of the Australian government.The fresh food sector has survived the onslaught of online shopping owing to the nature of the product and its shelf life. Consumer demand

The consumer demand has not decreased but merely has changed, where they are prone to check for product range and price using online shopping before buying a product from a retail shop. The retailers have taken advantage of the high dollar value to import products cheaply and then mark-up products to sell it to the consumers by the introduction of online shopping consumers have bypassed these mark-ups and buy their own goods.

The chart 2 from appendix sourced from the National Accounts which shows the level of household disposable income, and household consumption spending in real per capita terms, and shown on a log scale. The lower panel is the gross household saving ratio, which is the difference between the other two lines expressed as a share of income. This shows that the consumers have invested more due to higher interest rates which assure more returns as opposed to earlier years which is a reason for the sharp decline in retail sales.

The trend lines are also shown for each series in the top panel estimated up to 2005 and then extrapolated after that. The point is that trend consumption outstripped trend income growth between 1995 and 2005 (income grew at 2 per cent per annum and consumption at 2.8 per cent per annum). In the two decade prior (1975 to 1995) the growth in consumption was around 1.8 per cent per annum. The consumer demand in the last 5 years has been inconsistent. There was an increase in consumer demand in the early part of the period which was due to the availability of disposable incomes and low interest...
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