Economic growth is the increase in value of the goods and services produced by an economy. It is conventionally measured as the percent rate of increase in real gross domestic product, or GDP. Growth is usually calculated in real terms, i.e. inflation-adjusted terms, in order to net out the effect of inflation on the price of the goods and services produced. In economics, “economic growth” or “economic growth theory” typically refers to growth of potential output, i.e., production at “full employment,” which is caused by growth in aggregate demand or observed output. As economic growth is measured as the annual percent change of National Income it has all the advantages and drawbacks of that level variable. But people tend to attach a particular value to the annual percentage change, perhaps since it tells them what happens to their pay check.
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The real GDP per capita of an economy is often used as an indicator of the average standard of living of individuals in that country, and economic growth is therefore often seen as indicating an increase in the average standard of living. However, there are some problems in using growth in GDP per capita to measure general well being.GDP per capita does not provide any information relevant to the distribution of income in a country. GDP per capita does not take into account negative externalities from pollution consequent to economic growth. Thus, the amount of growth may be overstated once we take pollution into account. GDP per capita does not take into account positive externalities that may result from services such as education and health. GDP per capita excludes the value of all the activities that take place outside of the market place (such as cost-free leisure activities like hiking).
Economists are well aware of these deficiencies in GDP, thus, it should always be viewed merely as an indicator and not an absolute scale. Economists have developed mathematical tools to measure inequality, such as the Gini Coefficient. There are also alternate ways of measurement that consider the negative externalities that may result from pollution and resource depletion (see Green Gross Domestic Product.)The flaws of GDP may be important when studying public policy, however, for the purposes of economic growth in the long run it tends to be a very good indicator. There is no other indicator in economics which is as universal or as widely accepted as the GDP. Economic growth is exponential, where the exponent is determined by the PPP annual GDP growth rate. Thus, the differences in the annual growth from country A to country B will multiply up over the years. For example, a growth rate of 5% seems similar to 3%, but over two decades, the first economy would have grown by 165%, the second only by 80% (source: wikipedia).
1.2 Gross Domestic Product (GDP) – Australia
The market value of all final goods and services produced in Australia during a specific period. The growth rate of GDP is used as a broad gauge of the overall economic health. Robust GDP growth signals a heightened level of activity that is generally associated with a healthy economy. However, economic expansion also raises concerns about inflationary pressures, and strong GDP growth may induces the Australian central bank to raise interest rates in order to combat inflation. As a result, positive GDP readings are typically bullish for the Australian dollar, while slumping GDP growth is usually bearish.
1.3 Formula calculation of GDP
The calculation of GDP according to the following formula:
GDP = C + I + G + (EX – IM)
C = private consumption
I = private investment
G = government expenditure
EX = exports of goods and services
IM = imports of goods and services
1.4 Economic of Australia
Australia has one of the strongest economies in the world, with almost two consecutive decades of growth and the unemployment rate falling to generational lows. As a result of nearly three decades of structural and policy reforms the economy is flexible, resilient and increasingly integrated with global markets. Since 1991, Australia’s real economy has grown by an average of 3.3 per cent a year. Australia’s gross domestic product (GDP) in 2007 (in value terms) was around $1 trillion. Unemployment has also fallen, from a peak of almost 11 per cent 15 years ago to below 5 per cent in 2008, the lowest level since the 1970s. In its 2007 Economic Survey of Australia, the Organization for Economic Co-operation and Development (OECD) described Australia’s macroeconomic performance as impressive, with GDP growth since 2000 averaging above 3 per cent a year and growth in real gross domestic income averaging more than 4 per cent (including the terms of trade gains). Australia’s exports of goods and services rose 16 per cent to reach their highest value on record of $215.8 billion in 2006-07, about 21 per cent of Australia’s GDP. Australia’s businesses are competitive across a wide range of sectors. Australia has long been a major exporter of agricultural, minerals and energy commodities. More recently Australia has diversified into new services and sophisticated manufacturing export markets.
Australia economic has achieved average 2.9% GDP growth from 2000 to 2007. The main contributing factor to the GDP of Australia was private consumption expenditure. The total private consumption expenditure shows a rise from AUS$400,603million in 1997 to RM566, 221 million in 2007. These indicate the difference of nearly AUS$166,000million after ten years. Government consumption expenditure was the second contribution to the Australia GDP over the past ten years which rise AUS$46380. Private investment was the third economic engine which shows a minor growth to the GDP of Australia.
Overall Economy Performance analysis of Australia 1998 – 2007
The 1998 budget could not have been better timed. Had the deficit not been eliminated this year and the economy put on a more secure foundation, the instability in Asia would have taken an enormous toll on the Australian economy. This year’s budget has left the Australian economy stronger and more resilient in the face of the certain difficulties which will arise because of the crisis in Asia. There will be effects in Australia. But what the budget has done is ensure that whatever damage there is will be kept to a minimum. The return of the Australian economy to surplus has been crucial in maintaining confidence in spite of the difficulties now being faced.
In 1999, a surplus created out of tax increases merely allows public sector activity to continue at the expense of the private sector. The results is a less productive economy, and over time, a slower rate of growth in living standards than would have otherwise occurred. Australia’s growth rate in 1998-99 would have been well above four per cent and the unemployment rate would have fallen to around seven per cent or even less. The Government chose from the start the path of fiscal consolidation which has resulted in greater business confidence, lower rates of interest and a more productive economic structure.
Since 2000 to 2001, the Australian economy is now in the midst of a slowdown in activity. The slowdown has been largely due to decisions of the Reserve Bank of Australia to raise rates five times since November 1999 which has led to the slowing in the economy the rate increases were designed to effect. Yet it was not interest rates alone which have caused the economy to falter. Of particular importance has been the rising cost of crude oil which has put a damper on activity around the world. The higher cost of transportation has taken a toll on activity not just in Australia but overseas as well. Amongst the most important actions the Government can take is to ensure that not only is the budget surplus maintained, but there is only limited growth in the rate of public spending. Reductions to business taxes that improved the level of business retained earnings would be the most effective means to create a rapid improvement in the level of economic activity.
In the year of 2001, industrial relations reform will become increasingly important during 2001 and should, accordingly, be given a high priority during budget preparation. There are a number of immediate issues which will require attention if Australia is to achieve an adequate labour relations system, characterised by decentralisation and voluntarism. Innovation should be encouraged. It is the responsibility of the government to promote innovation through increased business investment in R&D to ensure that Australia maintains its ability to compete on a global level.
Climate change is a global issue, requiring a global solution. On the year 2002, the government’s recognition that the proposed mechanism of the Kyoto Protocol to solve the problem is flawed. This is a position fully supported by business. As developed by the Federal Government, there are four elements that will underpin the development of Australia’s forward climate change strategy. Based on Australia economy overview, recent increases in the official interest rates and award wages are detrimental to the interests of small business, especially when employment is the key consideration. The Government will facilitate Australia’s energy-intensive and trade-exposed sectors to respond to the challenges posed by greenhouse. For example, the Federal Government will encourage the development of promising low emissions technologies. Government policies will continue to ensure that clear signals are provided of the need for the economy to move to a lower greenhouse signature while businesses retain flexibility to plan efficient pathways to achieve that outcome.
In 2003, The strength of the Australian economy is dependent not upon government spending,
but upon the strength of private industry whose activities in fact fund public sector outlays. Financing the level of public outlays is a burden on all taxpayers. No consideration of the current structure of the Australian taxation system would be complete without regard being had to the issue of the proper role and extent of government spending. Raising revenue to fund government outlays is in itself costly. Ultimately, tax revenues are used to fund government expenditure on goods and services and the various income supplements it provides to individuals and business. Tourism impacts significantly on the Australian economy. In 2003-2004 the tourism industry accounted for $32 billion directly and nearly $26 billion indirectly of total Gross Domestic Product. This is equivalent to 7.1 per cent of the Australian Gross Domestic Product. This indirect economic information is important for efficient and effective policy decisions to guide the future development of tourism. To obtain this information, Tourism Research Australia requires an economic model based on the Tourism Satellite Account which estimates tourisms direct effects. The direct effect of tourism is when the change in tourism expenditure immediately affects production.
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In 2004, over the past year it has been the strongest economy in the entire developed world. It has continued to succeed in spite of what may have been the most severe drought of the past hundred years, in spite of a protracted international downturn, in spite of having high real rates of interest and in spite of the rising value of the dollar. The Australian economy, in spite of everything, has simply continued to grow. Investment expectations, although much lower than last year, remain positive. 2004 is thus expected to be a solid but hardly spectacular year. Its virtue lies in the improvement on the year before and the likelihood that Australia will perform much better than the other economies.
Throughout the year 2005, there are a number of risks facing the economy over the coming year, particularly from large US budget deficits, higher oil prices, a slowing housing market, capacity constraints and the continuing weakness in Australia’s trade performance. The government should also initiate a further round of economic reform, notably in the areas of taxation, workplace relations and education & skills development to lay the foundations for a stronger labour market and continued economic growth. Government policy should continue to recognise the special contributions made by small business, and the different ability of small business to meet regulatory and tax burdens. According to figures from Austrade, the Australian Government agency responsible for administering the program, 73 per cent of Export Market Development Grants Scheme Should Continue(EMDGS) claimant firms had less than 20 employees and 77 per cent of claimant firms had incomes less than $A5 Million per annum with 83 per cent earning less than that amount from exporting.
In 2006 , macroeconomic performance continues to be impressive which the gross domestic product (GDP) growth since the turn of the millennium has averaged above 3% per annum and, including the terms-of-trade gains, growth in real gross domestic income has averaged over 4%, among the handful of ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT(OECD) countries achieving such rapid growth; the unemployment rate has fallen to around 5%, its lowest level since the 1970s; inflation has remained within the target range; and, following a long stretch of fiscal surpluses, Australia is now one of the few OECD countries where general government net debt has been eliminated. Living standards have steadily improved since the beginning of the 1990s and now surpass all G7 countries except the United States. The efficiency of government services can be raised by clarifying responsibilities and improving co-operation in those areas, notably health, where the federal government and the states both have responsibilities. The terms of trade are currently around a 32-year high and business investment, especially in mining and associated infrastructure, is growing at double digit rates. Business investment will be underpinned by tight capacity in commodity sectors and strong profitability more generally.
At the year of 2007, Business investment has grown by 75 per cent in the past four years. This investment is positioning the Australian economy for future growth. Business investment is expected to be the largest contributor to GDP growth in 2005-06 and should remain at a high level in 2006-07. Investment has been particularly strong in the mining industry, and in related parts of the manufacturing, construction and transport industries.
But investment growth has also been broadly based in other sectors of the economy, including finance, property and business services and wholesale trade. Increases in corporate profitability and solid economic growth have been important factors in the recent strength of investment. The mining sector has been boosted by the very high prices received for Australia’s commodity exports.
Growth in business investment adds to Australia’s capital stock, boosting the economy’s productive capacity. This will allow the economy to continue to deliver strong growth with low inflation. Strong growth also benefits Australian workers by providing increased employment opportunities. The Government’s commitment to prudent economic management and its ongoing programme of reforms has provided a stable environment and growing economy in which businesses can make profitable investment decisions.
To manage the inflation and deflation of economics in the country, the government needs to create monetary policy. Inflation can be very damaging for a number of reasons. First, people may be left worse off if prices rise faster than their incomes. Second, inflation can reduce the value of an investment if the returns prove insufficient to compensate them for inflation. Third, since short period of inflation often go hand in hand with an overheated economy. Continued inflation also has longer-term effects. If money is losing its value, businesses and investors are less likely to make long-term contracts. This discourages long-term investment in the nation’s productive capacity. Monetary policy is one of the actions created by the national government that cooperates with Central Bank to control the economics in the country. They use its monetary power to control the money supply. If the central bank wishes to reduce money supply, it sells more bonds. When people buy these bonds, they pay for them with cheques drawn on banks. Therefore banks’ balances with the central bank are reduced. Government tries to sway all the level of economic movement in procession with its political points. The common aim of this is macroeconomic stability. This means low unemployment, low inflation, economic growth, and a balance of external payments. Monetary policy is usually ordered by Central banks that are chosen by government.
In the early economy, governments would supply money by casting priceless metals with their tread on. The value of the priceless metal peaked on the value of the money. Gold and metal also can be melted into coins. If a country holding coins that are created from gold and metal, the economics of the country will be hit largely. For the era of the industrial revolution, it was easy to introduce paper money to the country to change the flow of the amount of money. Because gold is very expensive for the standard value of money, so for the material of money was required to produce more banknotes that were paper, ink and a printing move forward.
According to Australia’s Reserve Bank Act, the central bank’s abroad policy objectives consist of upholding the stability of the currency, the maintenance of full employment, and the economic prosperity and welfare of the people in Australia.
There are two main topics about poor communication by the Australia’s RBA and successive governments about Australia’s flexible inflation targeting policy. First, the “average over the cycle” phrase is ambiguous, seeing that it can be understood in either a backward or forward-looking way. Second, the concept of averaging inflation over a sequence is impractical for two causes. This is because of the difficulties to estimate the business sequences. Another cause is that if one took the statement accurately, it would have need of the RBA to let previous determine monetary policy at channels and climaxes in the business cycle. But these are accurately the times at which monetary policy should be forward looking. The forward looking focus is necessary as policy influence the activity and inflation with insulate. Furthermore, understood the inflation objective, the Reserve Bank is significant to keep on reporting on how they observes in the economy that might be affecting the expectation outcomes.
In 2007, Governor and the Treasurer arranged to achieve an inflation rate of 2-3 percent on average as proper target. On the other words, the rate is adequately low that it does not considerably twist economic conclusions in the public. The inflation targets consequently the focus of the monetary framework. It offers regulation for monetary policy decision-making, and serves as a secure for private sector inflation expectations. The main dependability of Reserve Bank Board is for making a decision of monetary policy. The times of the conferences are already set up in progress. The staffs of the Reserve Bank have to a cleared report of developments in the Australian / national and international economies and financial markets. The finale decisions that are made by Reserve Bank Board are corresponded shortly in the public.
Open market operations are applied by the Reserve Bank. It is also known as domestic market operations that are to affect the cash rates. Government can sell and buys bonds to or from the market with the purpose of diminishing or raising money supply. Usually these actions are used to impact the interest rate. In general, if there are changes in interest rates, it will be publicized, and the central bank will follow the latest policies. With applying new interest rate, the government controls the money supply or demand to reach the equilibrium point. Government issues bond to raise the money supply in the public. High interest rate might cause the delay in investment and long term growth. When government issues the bonds, they would like postpone. That’s why the government needs to offer high interest rates in order to attract a large amount of people. By the way, high interest rates also persuade inflow of money from abroad which is increasing the exchange rates.
4. Conclusion
In past 10 years, the major trades in Australia include service, tourism, entertainment and so on. Especially service, the value which made by it takes about 70% in total value made within Australia.
In the mass, Australia has flexible economy resilient and increasingly integrated with global markets. Its real economy has grown by an average of 3.3 percent a year. The government use some accurate policies in order to control and improve Australia’s GDP. The market value of all final goods and services produced in Australia during a specific period from 1998 to 2007 keep growing with a healthy rate. Learning from graph, “GDP of Australia at chain value measured from 1998 to 2007”, we can see that except net export, private consumption expenditure, private investment and government consumption are increasing year by year. Net export is decreasing which means its import is more than export in recent years.
For policy, Australian government sets monetary policy so that to manage the inflation and deflation of economics in the country. Monetary policy is one of the actions created by the national government that cooperates with Central Bank to control the economics in the country. And it was used to control the money supply. This policy has effective influence in controlling Australia’s GDP.
In a word, Australia’s economy is operated very well, the policies are used accurately.
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