Principles of Financial Cycle and Macroeconomics

Question: Discuss about the Principles of Financial Cycle and Macroeconomics. Answer: Introduction Every economy faces certain macro and microeconomic issues that degrade the economic performance and stability. In order to understand the causes and impact of these issues, the Australian economy is chosen. The current situation of the Australian economy is discussed to determine the general stability. Furthermore, two major macroeconomic issues of Australia are identified. Discussion regarding the factors that cause the problems in the economy is made. The importance of government in addressing each of the issues is also discussed to help the economy increase its efficiency and productivity. The current macroeconomic situation of Australia The Australian economy is one of the largest mixed market economies all over the globe. As per the economic report, the GDP of the country is AUD$1.62 trillion. The total wealth of the economy is more than AUD$6.4 trillion. In 2012, Australia was the largest economy regarding nominal GDP. The economy of Australia is dominated by service sectors and comprises of 68% of total GDP. The economic growth of the country is further depended on the mining sector and agriculture sector. In the recent times, it has been identified that the economy is experiencing the decline in the mining industry. However, the economy of Australia remained resilient and stable in spite of the downfall in the mining industry (Benassy, 2014). As per the report of September 2016, the inflation rate (CPI) was 1.0%. The level of the labour force was 12 million while the unemployment rate was 5.7%. As Australia is a large largest mixed economy, it imports as well as exports large amount of goods. The net export of Australia was US$184.4 billion. It exported goods such as gold, iron ore, meat, alumina, machinery, and wool and transport equipment. The main export partners of Australia are China (32.2%), Japan (15.9%), South Korea (7.1%), United States (5.4%) and India (4.2%). The economy further imports goods from other economy and thus import amounts to US$208.4 billion. The country imports goods such as computers and office machines, machinery and transport equipment, crude oil and petroleum products, telecommunication equipment and parts. The major import partners are China, United States, Japan, South Korea, Thailand, and Germany. It can thus be stated that the economy earns higher amount from the import than the revenue ea rned from export. The public debt of Australia was 23.3% of GDP, and the budget deficit is $43.7 billion. However, the revenue earned by the economy is observed to be lower than the expenses. The economy earns revenue of approx $373.9 billion whereas the expense is $413.8 billion. It can be thus commented that the economic condition of Australia needs to be improved further. In order to remain sustained in the global market, Australia needs to adopt strategies that will help to increase the number of exports and revenue. The current macroeconomic situation of Australia can be considered stable with a smooth economic growth. However, with the end of commodity boom in Australia, the growth has slow down to a great extent (Mankiw, 2014). Nevertheless, the economy has not gone into a period of recession. The macroeconomic indicators such as GDP, inflation, unemployment, debt and current account balance of Australia varies favourably. The growth rate has increased at a constant rate while the unemployment rate is lower than most of the OECD economies. Two major macroeconomic problems and their main causes Australia faces inflation issues in the economy. Inflation refers to the rise in the price level of goods and services over a period of time that causes a loss in the value of the currency. Unlike developed world, the economic issues regarding inflation are opposite in Australia. The central bankers of Australia have hated this kind of inflation. The price level of oil had increased to a certain level that raised concern among the bankers as well as the common people. The problem of inflation adversely affected the workers of Australia who are not likely to get an increase in their payment (Coeurdacier Rey, 2013). Moreover, the business or firms that are unable to increase to increase their price level are affected as the profit margin falls. The inflation rate of Australia also hampers the revenue collection of the government from the tax. Due to the high inflation rate, the monetary policy was calibrated for the higher rate of 2%. However, this was accepted by the bankers as there were more borrowers allowed the average loan size to increase (Bernanke, Antonovics Frank, 2015). This resulted in more profit even though the rates were low. The inflation in Australia was a result of too much spending by the individuals during the economic bloom. The inflation resulted from the demand side. Borio, (2014) further mentioned that the aggregate demand of economy leads to widespread shortage which causes the price level of goods and services to rise. On the other hand, as the production costs rise there occurs cost inflation in the economy. The inflation rate of Australia is stunningly low. As per the RBA target, it needs to be 2 to 3 percent while Australia experiences 1.0%. This indicates that the economy is weak and needs to regulate the economic spending. The other problem that the economy faces is high unemployment rate. Unemployment can be described as a situation where the individuals actively seek job but are unable to find jobs over a given period of time. The analysis of new ABS data infers that there a number of unemployed people in the economy. In addition to this, there is a number of individuals who just started with new jobs. Altogether, it can be called as a hopeless index. According to Gandolfo, (2013), it becomes difficult for the individuals to find a new job after losing their existing job in an economy with high unemployment rate. The employment growth in Australia had failed to meet the level of expectation. There was a fall in the full time unemployment rate by 40,600, which overshadowed an increase in the part time employment rate. The causes of unemployment in Australia vary. However, the common cause of unemployment that the economy faces is the shutting down of industries in South Australia and across Australia in general. As the employers shut down their business or industries, it leads to thousands of workers losing their job. Moreover, in the economy of South Australia, the issue have greater impact as there is insufficient industry diversity to recruit the unemployed individuals. On the other, the decrease in private and public spending causes the industries to move overseas (Scarth, 2014). This further creates unemployment in the economy. It can be thus inferred that Australia needs to pay much attention towards the development of the economy in order to decrease the unemployment rate. Government measures The government of Australia plays a very important role in addressing the issues such as inflation and unemployment. Both inflation and unemployment are major macroeconomic issues that need to be effectively handled by Australia in order to maintain the sustainable market position in the global market. The government can apply various methods to bring the inflation rate under control. However, it is important to choose appropriate methods of addressing inflation. Controlling inflation through wage and price control causes the recession in the economy and thus creates addition problem for the economy. Hansen, (2016) mentioned that the contractionary monetary policy is one of the useful controlling methods. The policy aims to reduce the money supply in the economy by decreasing the price of bonds and increasing the rate of interest. The economic spending is thereby reduced. The spending is reduced since a lesser amount of money is available to the individuals. This further reduces the inflation rate. During the inflation in Australia, it is important to reduce the spending as it restricts the economic growth for certain time duration along with the rate of inflation (Gal, 2015). In order to carry out the contractionary policy, the government can achieve its goal in three ways. First, the government can increase the interest rate; the second way is to increase the reserve requirement by a certain amount of money such that there is adequate money to keep on hands to cover up withdraws. The third method is to reduce the money supply through direct or indirect enacting policies (Taylor, 2016). The government can also reduce the unemployment in the economy by adopting several policies such as monetary and fiscal policies. As per the monetary policy, the interest rate can be lowered so that the aggregate demand increases. The rise in the demand for goods and services will encourage the sellers to produce more goods. Therefore, more workers will be employed to increase the production and further decrease the unemployment rate. The fiscal policy includes cutting down the tax rate (Weiss, 2014). When the tax rate is lowered, the disposable income of the individual rises. This further increases the aggregate demand and reduces the unemployment rate in Australia. The firms can further deliver education and training tothe unemployed to increase their skills or match their skills with the demand of the market. This will reduce the structural unemployment in the economy. The geographical subsidies provided by the firms helps to invest in depressed areas. The government can reduce real wage unemployment in Australia by reducing the minimum wage of the employees. As per the words of Georgellis, (2015), more flexible labour market makes it easy for the firms to hire workers. It is, therefore, important for Australia to adopt strategies that will make the labour market more flexible and thus allow easy absorption of employees to reduce unemployment. It can be thus stated that the government and other institution of Australia can reduce the macroeconomic issues with the implementation of effective strategies. Conclusion The Australian economy is stable with a continuous economic growth. However, there has been a slowdown in the economy growth to a great extent. There is an increase in the growth rate at a constant rate whereas the level of unemployment is lower than most of the OECD economies. The two economic issues that prevailed in the economy were inflation and unemployment. Different factors caused these issues in the economy. However, the government is capable of addressing these issues with the implementation of monetary, fiscal and other different policies in the economy. References Benassy, J. P. (2014).Macroeconomics: an introduction to the non-Walrasian approach. Academic Press. Bernanke, B., Antonovics, K., Frank, R. (2015).Principles of macroeconomics. McGraw-Hill Higher Education. Borio, C. (2014). The financial cycle and macroeconomics: What have we learnt?.Journal of Banking Finance,45, 182-198. Coeurdacier, N., Rey, H. (2013). Home bias in open economy financial macroeconomics.Journal of Economic Literature,51(1), 63-115. Gal, J. (2015).Monetary policy, inflation, and the business cycle: an introduction to the new Keynesian framework and its applications. Princeton University Press. Gandolfo, G. (2013).International Economics II: International Monetary Theory and Open-Economy Macroeconomics. Springer Science Business Media. Georgellis, Y. (2015, January). Regional unemployment and employee organizational commitment. InAcademy of Management Proceedings(Vol. 2015, No. 1, p. 12430). Academy of Management. Hansen, B. (2016).A Study in the Theory of Inflation. Routledge. Mankiw, N. G. (2014).Principles of macroeconomics. Cengage Learning. Scarth, W. (2014). Macroeconomics.Books. Taylor, J. B. (2016). The Staying Power of Staggered Wage and Price Setting Models in Macroeconomics. Weiss, A. (2014).Efficiency wages: Models of unemployment, layoffs, and wage dispersion. Princeton University Press.