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The Current Status of the Australian Economy

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The Current Status of the Australian Economy

Assignment 3

A Collect, organize, present and analyse a range of data which describes

the current state of the Australian economy(with respect to the trade

cycle).

B Describe and analyse the monetary policy stance which has been adopted

by the RBA over the past 2 years. How effective is monetary policy in

achieving the policy objectives of the government?

Introduction Part A

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This report contains an informed and balanced analysis of a range of

data which assists in depicting the current state of the Australian economy in

relation to the trade cycle.

Relevant Data

For various reasons, economic activity fluctuates from year to year.

Periods of rising activity, output and income are called booms and

periods of slower activity are called a trough. Generally when real

GDP is above 4 per cent p.a. it would be considered a boom year and

when there are technically, two consecutive quarters of negative

economic growth it would be considered a trough or a recession.

In the short term the level of economic activity fluctuates. In some

years, growth is fast and business conditions are booming. In other

years, the level of activity is slow, so growth in output, income and

employment is also less than average. These fluctuations are called

the trade cycle.

There are a number of economic indicators which are useful for

determining what stage of the trade cycle the Australian economy is

currently in, such as Gross domestic product, unemployment, inflation,

interest rates, building approvals and home loan approval, just to

name a few.

Changes in Aggregate Demand

Changes in the level of Aggregate Demand (AD) are critical

determinants of trade cycle fluctuations. GDP is the sum of

consumption, investment, government purchases and net exports. Y = C

+ I + G + NX

The following table outlines these elements and influencing factors.

Elements of GDP

Major factors affecting this component

Consumption (C)

Disposable income (Yd); interest rates (r); expectations about the

future; stock of wealth.

Investment (I)

Past levels of profit; expectations about the futre business

conditions; interest rates (r)

Government expenditure

Determined in accordance with government policy

Net exports

Determined by the interplay of C & I conditions in other countries and

Australia.

Output and Unemployment

As Gans, King and Stonecash state, “Changes in the economy’s output of

goods and services are strongly correlated with changes in the

economy’s utilization of its labour forces”. Generally as

Gross Domestic Product declines then the rate of unemployment rises,

basically as companies produce less goods and services, they require

less staff or are not employing new members, thus the number of people
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