Macroeconomic Policy Essay
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The main components of macroeconomic policy are monetary and fiscal policy. The main aims of macroeconomic policy are continued economic growth, high employment, stable prices (low inflation), an elevation in average living standards, and a maintainable stance on the balance of payments (Macroeconomics). Practically all governments apply macroeconomic policies to reach policy goals and to improve the workings of the economy. Economic growth is important for reducing poverty levels. Continued growth means the ability to meet the needs of the current generation without burdening future generations with debt (Macroeconomics). Low inflation rates are important because high inflation rates can damage the international competitiveness of a…show more content…
It can be defined as the usage of government spending and taxation to alter the state of the economy (Weil). Fiscal policy is essential to managing the economy since it can affect the total amount of output produced or the gross domestic product. If expenditures are increased and taxes are reduced, people will have higher incomes which requires additional output, and in turn, generates more income and spending. Initial increases in government expenditures or reduction in taxes led to a collective increase in Gross National Product (Pechman). Declines in spending or rises in taxes reduce GNP.
Tax policy, one division of fiscal policy, could lead to tax adjustments that could be used to restrict or stimulate demand and can be used to stabilize inflation. If the government purchases more goods and services, economic activity goes up. If the government cuts taxes, then consumers end up with higher incomes, after taxes are removed. This leads to a boost in spending and economic activity. According to Greg Mankiw from Harvard University, the four goals of tax policy should be efficiency, intergenerational equality, egalitarianism, and stabilization (Mankiw). The tax system should raise enough revenue so that future generations are not burdened with debt. Tax policy should also attempt to establish more equal after-tax incomes. Lastly, tax policy should help the economy maintain a relatively high level of
Macro economic indicator is the main measure that indicates not only the overall health of the whole economy but also it gives some insight in to its future. World economic indicators can be classified mainly in to three types; pro cyclic, counter cyclic and a cyclic. A pro cyclic indicator is an indicator which moves in the direction of the economic movement of a country i.e., (the economic indicators move proportionate with the trend of economic performance). The best example of a pro cyclic indicator is GDP. An indicator is said to be counter cyclic if the indicators is inversely proportional to the economic performance. Best example for counter cyclic economic indicator is Unemployment. The third type, a cyclic economic indicator is an economic indicator which doesn't have a direct relationship with the economic performance; hence it is not a good method to be used.
Monetary Policy and Inflation
The implementation of monetary policy by a reserve bank is done with the goal of making the economy better off; that is to create a sustained low inflation environment by the proper management of interest rates, money supply and financial conditions to achieve high economic growth and employment and efficient utilization of resources available in the society. The path to progress of economy can be obtained with maintained price stability, which is the outcome of proper monetary policy decisions, conditions and rules. The main tools are open market operations in securities markets by central bank and intervention in foreign exchange market. In Australia Reserve Bank of Australia is responsible for formulating and implementing monetary policy. Its main objectives are:
- Stability of the currency
- Maintenance of full employment
- Economic prosperity and welfare of the people
Major indicator used for monetary policy frame work is inflation. It can be defined as the overall general upward price movement of goods and services in an economy usually as measured by the consumer price index and producer price index. As the price of the goods and services increases the purchasing power of the consumer falls down which results in inflation. The rate of inflation fluctuates from time to time. Over the last half centuries the inflation has been greatly fluctuating ranging from 0 - 20 percentage. Even though Australia try to maintain a specific rate of inflation which is usually 2 - 3 percentage but can vary depending on circumstances. As food price raised Australia's inflation rate picked up, adding to likely hood of a rate hike. Bureau of statistics said that in the fourth quarter of the previous three months the consumer price index climbed 0.5 percentages. Inflation on an annual basis rose 2.1%. Australian Bureau of Statistics Said that fruit price jumped 15.9percentage for the quarter; there is an increase in domestic travel and accommodation by 6.6 percentages. The cost of beer rose 2.1 percentage and rent and home purchases rose 1 percentage. Offsetting those price increase were petrol down 2.8 percentage, and pharmaceuticals down 5.3 percentages. Computers and electronic prices decreased 7.15% in the quarter ABS said. This rise in prices makes Glen Stevens, the central bank governor to rise up the bench mark lending rate this quarter after he became the only policy maker in the world to raise borrowing rates last year. The figures published this month shows that the confidence is surging amid the biggest hiring boom in more than three years, stocking pressure on inflation, which the bank aims to keep between 2 percent and three percent.
The fiscal policy is the strength of government policy that affects the economy through the budget by changes in government expenditure, welfare payments and changes in tax. It tells about overall effect of budget outcome on economic activity. Its main goals are price stability, full employment and the economic growth. This policy will regulate the flow of money in the economy, and also the disposable income in the hands of the consumers. But, the implementation of fiscal policy always has a slow impact on the economy. It affects income distribution, resource allocation pattern, economic activity level and the aggregate demand.
Gross Domestic Product
The Gross Domestic Product or Gross Domestic Income is the market value of all final goods and services made within the borders of a country in a year. GDP is divided among four components of expenditure: consumption, investment, government purchases, and net exports. The output of these components are valued at its market price and the values are added together to get GDP.
GDP = Consumption + Investment + Government Spending + Net export.
There are three approaches to calculating GDP
- Expenditure approach - calculates the final spending on goods and services.
- Product approach - calculates the market value of goods and services.
- Income approach - sums the income received by all producers in the country.
Australia and its GDP
GDP is considered to be one of the best economic indicators that reflect the face of the economy. It's one among the widely accepted economic indicators throughout the world. A rise in GDP reflects that there is growth in that particular economy.
There has been an increase in 0.9% in the Australian GDP in the last quarter. The current Australian GDP is at net 1015 billion dollars. In comparison to the world economy it is 1.64% of the world economy. The major contributors to the Australian economy are the service sector followed by the agricultural sector and the mining industry. The availability of abundant natural resources is an added advantage which makes the economy more competitive. If we have an overlook on the Australian economy we could see that Australia was in a position to maintain steady growth in the period over January 2006 - January 2010, but there was an exception in the quarter January 2009, where we see a negative growth of 0.9%. Making an analysis we see that Australia was in a position to maintain steady economic growth i.e., a steady positive performance in the GDP (output levels). The negative growth recorded in the quarter ended January 2009 was out of recession which is a phenomenon that arises out of the fall in the general output levels. In the period of late 2008 and early 2009 we saw that the world economy was moving in to recession as a result of fall in the general output levels. Many of the world major economies were heavily hit by the recession, especially the United States followed by other economies moving in to the recession. It all started with the subprime crisis that arose as a result of excessive lending, in the United States. Many of the banking majors like the Lehman brothers which had its history dated back to early 19th century had to shut down due to heavy losses. This kind of excessive lending in the US created many problems as the reality sector was shooting up over a continuous period of time. In the initial stages it was considered to be good but later on it was difficult to realize that the results were disastrous. The excessive lending process resulted in excessive money circulation within the economy, this resulted in inflation as a result the Federal Reserve increase the interest rate which made the borrowings more expensive. As an effect of making the borrowings more expensive it made the consumers being put in to a situation where their bills being more expensive. In certain cases the payoff on the bills was more than their net income. This resulted in bankruptcy in large masses. The excessive borrowings made by the consumers were used as investment in the realty sector, this made the housing prices in the US shooting up and this came to a bridle when the borrowings were made expensive which in turn resulted in a change in scenario from excess demand over supply to excess supply over demand. The effect of this was seen worldwide and the impact of this was even seen in Australia where the housing prices dipped in late 2008 and early 2009. This was the reason for the fall in output levels in the quarter January 2009 in Australia. As this was a worldwide phenomenon Australia was also affected, but the fact to be noted is that the impact in Australia was not as disastrous in comparison to United States and Europe.
In Macro Economics a classic model states that economy is always at full employment. Unemployment if observed at any stage is seen as purely frictional, many possible reasons can result for employment like workers switching jobs often. Since there is no element of unemployment in the model so no relation can be seen in Labor Market and behavior of wages. As wages are only determined by productivity of a product and impact of pricing but by no means unemployment has no role to play.
The key driver of poverty in Australia is unemployment. Unemployment rate is one of the economic indicators of the level to which Australian economy is operating to its full capacity. It defines the unemployment level divided by the labor force. Australia uses the standard definition of employment. The unemployment rate of Australia started increasing since World War I and II. Australia has taken great efforts to lower the unemployment rates all the time.
The worst of the global recession was avoided by Australia but there was a steady increase in the unemployment since 2008. The strong effect of the fiscal stimulus package of Australia, tax cuts and public expenditure has cushioned the increase of unemployment created because of the global economic downturn. The working hour's adjustments prevented large job losses, but this led to the growth of the discontentment in the workers. There was a quick rise in the youth unemployment rate.
The bar chart shown above gives the present unemployment rates of the major economies in the world. When compared with unemployment rates of other major economies, we see the Australia has considerably lesser rate of about 5.3%. But this rise in the employment rate was less than the expected. This is one of the lowest unemployment rates the Australia has had since global economic recession hit the country.
The availability of the country's resources and the global demand for them are believed to be the main reasons for the lowering of the unemployment rate from about 5.5 % (December). And this rate is less than the expected rate (5.6 %). The government reports shows that about 196,000 jobs were added by the Australian employers and about 16,000 full-time employees and additional 36,900 part-time workers are believed to have been hired to ease the unemployment rate.
The trend estimates showing the recent monthly rates and figures of March 2010 related to the unemployment is given below:-
- There is an increase in the employment to 10,991,900 (ABS, March 2010)
- There is a decrease in unemployment to 611,000 (ABS, March 2010)
- The rate of unemployment is 5.3% (ABS, March 2010)
- The constant labor participation rate is maintained at 65.2%(ABS, March 2010)
- There is an increase in the aggregate monthly hours worked increased to 1,540.5 million hours(ABS, March 2010)
- The male employment rate is 5.4% and female unemployment rate is 5.3%.(ABS, March 2010)
On a state breakdown, we see that there is a decrease in the unemployment rate eased in New South Wales from 6.8 % in March to 6 % in April. Victoria remained constant at 5.6 %, increase in Queensland's rate by 0.1 % to 4.9 %; fall in South Australia's rate from 5.9 % to 5.5 %, and a drop in Western Australia's rate from 4.9 % to 4.5 %.
The small decrease in the unemployment rate has help to increase the growth in the Gross Domestic Product (GDP) of Australia. This increases the output of the companies. The increase in the GDP has led to the increase in the price of the goods and services and this has led to the increase in the inflation rate. But, the Australian economy has a tendency to continue in an ongoing cycle of this and will continue in the future. It has been seen that staff retention issues or problems have occurred due to the low unemployment rate of Australia with important effects of business. A latest survey conducted by Drake Edwards, Strategic Manager of Drake international commenting (March 2010), has identified several areas of staff retention.
The findings are:-
About 80% of employees give much importance in having a challenging and a very satisfying work in order to continue their work; and 75 % gives importance to better work life balance, career development opportunity and better management and leadership; and comparatively less percentage of employees gives importance to increased salary in Australia. (Article: Unemployment rate unchanged at 5.3 %, by David Olsen on Thursday, 8 April 2010)
The lowering of the unemployment rate has led to economic growth and wage growth and increase in the aggregate demand. That is, the deficient aggregate demand and the real wage growth predominantly produce changes in the unemployment.
Measures taken by the Australian government to reduce unemployment
The main strengths of the macroeconomic frameworks and the Australian government's commitment to well-functioning markets are its high labor force participation, low unemployment, and the solid productivity growth. The constant sustainable economic growth can only be achieved with stable and low unemployment and inflation. These outcomes can only be supported by a sound macroeconomic policy frame work for fiscal and monetary policy.
The fiscal policy has great impact on the economic activity and employment. The political factors in the allocation of funds indirectly do affect the unemployment rate. For example, programs such as ‘Roads to Recovery program' during the period of Australian election in 2001-04 has improved the local economic activity and has reduced unemployment to an extent. This led to a decrease in the local area unemployment rates (Leigh, 2008). The introduction of such programs is being utilized to reduce the unemployment rate in Australia.
Government always maintain budget balance over the course of economic cycle, takes into account the fiscal risks, national saving adequacy, the financial effect of policy decisions in future generations and the integrity and stability of the tax system in order to attain sustainable economic growth which will reduce the unemployment.
The government has placed emphasis on the policies that raise the labor force participation. Some of the policies are the introduction of the welfare to work package that has measures to reduce reliance on the welfare and increase incentives to enter the workforce. Personal income tax cuts with the marginal tax rates cuts and increased thresholds, the Family tax benefit changes have also increased the returns to work. Some measures are the recent superannuation reforms; labor market reforms to improve the labor market flexibility to reduce structural employment, introduction of labor market programs and training programs and the introduction of the mature age worker tax offset have improved the work incentives for the old people. Some policies are microeconomic reforms that improve resource allocation among industries and firms for output maximization that improve efficiency and productivity of producer. They are introduction of industry reforms that provide innovation that increase productivity and growth by improving efficiency growth and job creation; and taxation reforms.
The Council of Australian Governments had announced the National Reform Agenda (NRA) for the productivity growth and labor force participation and to bring human capital improvements.
Several models are introduced to develop different policy options to reduce the unemployment in Australia.
To conclude there has been a massive improvement in the output levels as per the latest statistics in comparison to the previous year. This can be justified with the recovery seen with in the economy. There has been a steady improvement in the employment levels since the quarter ended January 2009. The current jobless rate is at 5.30% which is much better than the last quarter. Growth rate recorded in the last quarter is 0.9% which has made the index in green. The inflation rate is at 2.10%, which is considered to be positive as a rate of 2-3% in inflation is considered to be favorable. In Australia inflation is calculated on the Consumer Price Index which makes the estimates and speculation more accurate and transparent, unlike countries like India where inflation is calculated on the Wholesale Price Index. If the inflation is calculated on the Wholesale Price Index it doesn't give a correct picture in the economy as the retailers charge a significant excess over the margin than the actual change in price. The overall performance in the economy is good as there was an increase in interest rate recently to 4%. The increase in interest rate shows that there was sufficient demand for funds and a favorable level of spending over a period of time.
Source: Essay UK - http://www.essay.uk.com/free-essays/economics/macro-economic-indicator.php
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