Globalization has had a greater integration between different countries and its increasing impact on all aspects of life and economic activities. As Australia’s economy becomes increasingly tied to the global economy, even minor changes in the global economy will have a significant impact on Australian trade, financial flows, and fluctuations in interest rates, exchange rates, government policies, causing changes in its current account and net foreign debt.
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Being thirteenth largest economy in the world, over the past thirty years, the Australian economy has experienced positive reforms that have stimulated the economy and raised the standard of living. Australia is currently riding the boom product, especially the huge contracts signed with China to fuel its economy the fastest growing player in the world with raw materials and energy it so desperately needs. Although during the financial crisis, Australia has continued to grow driven by its commodity exports, and is expected that growth will continue for at least five years.
The purpose of this essay is to analyze the concept of balance of payment in association with the macro and micro economic policy settings in Australia. I would like to bring in to the kind attention of the reader that, this essay covering a broader topic of International Economics has been successfully completed after gaining a substantial understanding from the various reliable sources including books, online articles and internet resources.
2.0 Australian Balance of Payment – An Overview
Balance of payment records all economic transactions between Australia and the rest of the countries around the world annually. The balance of payment is made up of two distinguished components respectively the current account, capital and financial accounts. Transactions such as exports and imports of goods and services, income and transfers are recorded in the current account. On the other hand transactions relating to portfolio and foreign direct investments are recorded on the capital and financial accounts. Balance of payment is an important indicator of the health of Australian business as it reflects its international trade and investment performance.
3.0 Macroeconomic policy setting in Australia
Macroeconomics examines a nations’ economic structure and answers to the critical economic questions respectively, when the economy grows over time? What causes short-term fluctuations of the economy? What affects the values of various economic indicators and how these affect the performance of economic indicators? The Australian government in recent decades has traditionally sought to achieve three major economic objectives which are respectively; economic growth, internal and external balance with in an economy. Together, these three objectives are expected to support national economic growth, maintaining low inflation and limit the size of external debt and liabilities. The Australian government has designed macroeconomic management to minimize fluctuations in demand through the influence, while growth might be possible, with low inflation and low unemployment. However, due to the nature of demand, macroeconomic policies can not be used exclusively, so it is used together with the influence offered by microeconomics reforms. Therefore by influencing the direction and with the economy, the Australian government uses two instruments of fiscal and monetary policy.
Fiscal policy is mainly to use public funds to influence economic objectives by varying the amount of expenditures and revenues, in turn, change in economic activity with a budget surplus, budget deficit or balanced budget. As the budget may affect the economy back into the economy can affect budgetary outcomes. On a short term, expansionary fiscal policy is an employed, when the government seeks to stimulate growth. This occurs through increased public spending and tax reductions which will lead to increased consumption and increased investment opportunities. Similarly, inconsistent fiscal policy is also committed to slowing the economy and reduces foreign debt and deficits Current account (CAD). The level of income distribution and management of resource use can also be attributed to some results of a fiscal stance.
In association with the use of fiscal policy, monetary policy implies an action of the Reserve Bank of Australia (RBA) to influence the cost and availability of money and credit in the Australian economy. Traditionally, the objective of the monetary policy is to achieve an internal balance by influencing the level of interest rates through market operations, including the sale and purchase of government bonds, the correction of a shortage or excess funds, respectively, after a short money market.
In order to facilitate and to ease monetary policy, the Reserve Bank of Australia would need to buy bonds in order to create excess liquidity apply downward pressure on interest rates and stimulated consumption and investment and unemployment will ultimately lower. In response to inflationary pressures, a tighter monetary policy is expected to allow the Reserve Bank of Australia, to sell bonds and floating funds in order to push interest rates to control government spending.
Macroeconomic policies have traditionally influenced powerful short-term demand in the economy and in the past ten years, budget policy has played a significant role in the mix of macroeconomic policies, where the government has used this policy aims to improve Australia’s national savings and control of state government debt to maintain the external factors in order to maintain the external stability, which offers ample opportunities for a prospective economic growth. Therefore it is very much evident that, the Australian government’s macro economic policy mix is proved to be successful to control the negative effects of demand. In the broader sense, it had little impact on structural problems in Australia, and once the micro-economic reform came in relief in the past ten years, the macro policies to help resolve supply constraints, in order to improve Australia’s international competitiveness.
4.0 Microeconomic policy setting in Australia
Microeconomics is a research, which focuses on how individual behaviors and decisions that affect demand and supply of products and services. Microeconomics decisions in governments, organizations and individuals are motivated by the considerations of costs and benefits. Costs can be either in terms of financial costs, to be more precise, the average fixed and variable costs or may be in terms of opportunity costs, which consider the alternatives in advance.
The Australian government has a number of pre-determined economic objectives it wants to achieve, in response to economic constraints in Australia. Since these objectives can be extremely difficult to achieve at the same time, the Australian government not only has to compromise with these objectives, but also Australian government must prioritize their policies to reach the economically and socially good for the nation. Microeconomic policies specifically involved actions to improve the functioning of businesses, industries and markets in order to influence levels of aggregate supply.
In recent decades, it has been argued that many economic problems in Australia are caused by structural factors uncontrollable by macro-economic policies, such as lack of competitiveness of local producers and high structural unemployment resulting from the supply context. Therefore the Australian government has decided to focus concentrated on the accounts for structural supply problems hampered its microeconomic growth. To achieve this restructuring, the government sought to remove the improvement of productivity and flexibility to promote the efficient production of existing resources.
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In an attempt to achieve the goal of maximizing efficiency and minimizing production costs, companies are more likely to adopt the latest technologies to produce goods and services. The elimination of distortions such as government regulations encourage economies to maintain dynamic efficiency, where producers are able to react quickly to changing demand in the global economy, leading to progress through innovation and development. Australian Microeconomic reforms contribute to achieving these goals by maximizing competition.
It is essential that more competitive markets tend to rapidly embrace structural change. The Australian government has helped change the research of effective competition, the microeconomic policies used to reach markets are contestable, which means that new entrants have a chance to compete with existing businesses which could be a positive sign for the Australian economy.
A microeconomic reform in Australia has progressed to micro economic policies to improve efficiency rather than protecting the industry. By phasing out tariffs, resources have been reallocated to the most efficient industries in Australia, which has enabled more international competitiveness, while working on comparative advantages. For industries become more competitive, and to justify the removal of protection, the government has taken to reform the labor market as the core to increase productivity in the economy. Also In recent years, decentralization of wage determination is important that wages and working conditions are now primarily based on productivity improvements through collective bargaining agreements, abolition of workflow restrictive and inefficient.
However, economists generally believe that microeconomic policy has been successful in providing productivity, increase sustainable economic growth, low inflation and increased competitiveness, but yet in many areas, Australia is in the process of catching up with the rest the world. Despite the effectiveness of these policies, the segments of the unemployed society and rural Australians are increasingly frustrated by the lag effect of these policies.
Therefore it is very much evident that Australia should overcome the lack of popularity through the educating its citizens in long-term benefits of microeconomic reform, rather than letting them see that the short-term disadvantages. The future will decide, if the microeconomic policy setting in Australia will be assisting to achieve a respectable level of sustainable economic growth.
5.0 Recommendations
The current account deficit appears to be a critical crisis when it is at the higher levels. However, it is believed that if the current account deficit is in its appropriate level, it will significantly boost and strengthen the Australian economy. Also, if the borrowed funds in Australia are financed in the investment sector, it is expected that an increasing productivity would create ample job opportunities, where the return of investments will be paid to foreign lenders.
It is expected that entrepreneurs need to make profits in order to expand their businesses. But, taxes absorb the profits and make enterprise less attractive. On the other hand, government regulations on trade should be reduced, but a few should be imposed at the least, as there is always a necessity to ensure fair competition.
Being a developed nation, Australia should not neglect the adverse effects of the current account deficit; therefore it must keep an eye on the cause, where the Australian government must use an appropriate mechanism to resolve it. All of the above helps the economy grow and as a result, a positive economic growth and development can be expected while enjoying a current account surplus.
6.0 Conclusion
As a conclusion, with my utmost level of confidence, I want to bring in to the kind attention of the assessor that I strongly feel that the reader would be able grasp the International Economics concept of balance of payment in association with the macro and micro economic policy settings in Australia, based on the recommendations I have provided after carefully researching the respective subject area.
I strongly believe that the information that I have provided in this essay will definitely satisfy the assessment evaluation criteria. Also I wish to mention that, at the best of my knowledge, I’ve acknowledged all the sources which I did refer to complete this essay. Last but not the least I wish to convey my heartfelt gratitude towards my lecturer, my parents, my colleagues and all other well wishers who immensely supported me throughout my studies in order to successfully complete this essay.
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