State of the Australian economy

Topics: Inflation, Macroeconomics, Monetary policy Pages: 19 (3640 words) Published: May 28, 2014
Economics Report
Section 1:
Analyse the recent trends in Australia’s major economic objectives. (Economic growth, inflation, unemployment, the exchange rate, environmental sustainability and distribution of income)

Economic growth -

Economic growth occurs when there is a sustained increase in a country’s productive capacity over time. This is generally measured by the percentage increase in real gross domestic problem. The target for economic growth set by the government is around 3-4%. Australia over the past 20 years has experienced non-inflationary growth at an average rate of 3.5% and has not experienced an economic downturn since 1990/91. This success is largely due to the significant microeconomic reforms in the 1980’s as well as the resources boom and high levels of consumer confidence have left the Australian economy in a strong position. Levels of economic following the prolonged period of growth in 2007/08 were at 3.8%, levels of growth, this fell to 1.6% during the 2008/09 financial year as a result of the Global financial crisis and the subsequent decrease in exports, consumer spending and levels of investment. In 2009/10 this figure had risen to 2.1% primarily as a result of the continuing strong levels of growth in China through the GFC (6.2% shown in Diagram 2). 2011/12 saw level of economic growth rise strongly to 3.5%, a similar figure to that of pre GFC economic growth this came as a result of increased consumer spending, investment and the terms of trade for exports reached the highest level for 140 years in September 2011. This though did not last and in 2012/13 economic growth had fallen to 2.8% as a result of falling terms of trade and lower aggregate demand in the economy. Currently the level of economic growth in January 2014 is 2.3%, this figure represents a sub par performance.

Diagram 1

Diagram 2

Inflation -

Inflation is the sustained increase in the general level of prices over a period of time, usually one year. This is commonly measured by the percentage change in the Consumer Price index (CPI), after the 1990/91-recession inflation dropped below 5% after an extended period of levels of high inflation. From 1994 to 2013 inflation averaged 2.7% as a result of the microeconomic reforms of the 1980s as well as the introduction of inflation targeting by the Reserve bank between 2-3% in 1993. During 2007/08, inflation was recorded at 4.3% as a result of the Australian economy producing at close to its full capacity; production costs such as labour, materials and transport were rising across the economy and feeding through to higher consumer prices. 2008/09 saw a significant decrease in levels of Inflation to 1.5% as a result of the GFC and the subsequent decrease in consumer spending, lower investment, lower demand for labour by business and lower wage growth for workers. The recovery of world economies also lead to a subsequent growth in inflation and by 2010/11 inflation had risen to 3.3% as a result of the pick up in aggregate demand. Though in 2011/12 inflation fell to 1.7%. Currently the level of inflation is 2.7% this is a sound result as it is within the RBA’s targeted level of inflation.

Diagram 3

Unemployment –

This refers to the situation where individuals want to work but are unable to find a job, and as a result labour resources in an economy are not utilised fully. The accepted rate of unemployment in the Australian economy is 4-5%. Unemployment in 2007 was at 4.2% a 30-year low; this is attributed to the sustained levels of economic growth over the period and labour market reforms taking place. Following the Global financial crisis in 2008 levels of unemployment rose from 4.0% to in February 2008 to 5.9% in in June 2009. As labor is a derived demand, the slowdown in economic activity as a result of the GFC lead to a decrease in the...
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