Gross Domestic Product (GDP)The gross domestic product (GDP) measures ofnational income and output for a given country’s economy. The GDP is equal tothe total expenditures for all final goods and services produced within thecountry in a specific time period.
GDP can be calculated throughGDP=C+I+G+(X-I)Where, C stands for consumption, I stands forInvestment, G government funds and net export or balance of trade where export(X)are added and imports(I) are subtracted.Australia’s economy is led by the servicesector such as finance, education and tourism. yet its economic success inrecent years is due to export of mining minerals and agricultural products.
Other sectors include manufacturing and construction.Per trading economics, GDP is an indicator ofthe economic health of a country and measure of standard of living in acountry. The Gross Domestic Product in Australia was worth 1345.35 billion USdollars in 2015. The GDP value of Australia represents 1.
94 percent of theworld economy. Interestrate (cash rate)Cash rate is the interest rate charged by theReserve Bank of Australia(RBA) on the loans granted for commercial bank. Italso can be described as interbank loan. This allows the Reserve Bank ofAustralia to adjust the interest rates in country’s economy. The Official Cash Ratecannot be changed by transactions between commercial banks or institutions asthis does not bring change in money supply but only the locations of cash.
Onlytransfers between the RBA and other institution or bank can affect the cashrate. From the table1 data above we can see the cash rate change over followingyears.hasbeen a recession free country for more than 25 years. From the forecasts, itcould be guessed that the country would neither face recession nor anexpansion. But however, there are many ways the country could boost itseconomy.
With the initiatives mentioned, along with a strong macroeconomicenvironment, it will provide Australia with the provision to achieve itstargets In the early years, theinterest rate was high around 7.5 to 17% but the growth rate decreased from3.53%(1990) to 0.44%(1992), which suggests higher the cash rate the GDP growthwill be affected negatively. In other way, if the central bank increases interestrate, bank and other business borrow less, invest less which will have negativeeffect on production and employment resulting in lower GDP.
Thus, RBA as aregulator of monetary policy, to bring growth and balance in GDP it lowers itsinterest rate to facilitate investments and GDP growth.UnemploymentrateThe unemployment rate is the share of the laborforce who are without job, expressed as a percentage. It generally changesresponding to change in economic conditions. When the economy of a country doesnot have good shape and jobs are less or more people lose job, in this case unemploymentrate can rise higher but when there is economic growth more jobs and opportunitiesare created, the unemployment rate falls.From the study of above table1 data, we canrepresent as a graph below:As we can see from the graph, in the initialyear unemployment rate was 6.9 in 1990, where it increased to 10.9 in next twoyears.
But GDP growth rate decreased from 3.53 to 0.44% for same year. Itsuggests that as the demand and consumer consumption or spending decreasesfirms will produce less which results decrease in production, need of laborforce also decreases which makes rise in unemployment but decrease in economicgrowth.
In this situation, monetary policy need to be loosen decreasing theinterest rate where firms will be motivated to invest more, creating jobopportunities and growth in income will bring increase in consumer consumption. InflationrateInflation rate refers to increase in theConsumer Price Index (CPI), which is a weighted average of prices for differentgoods. The set of goods that make up the index depends on which are consideredrepresentative of a common consumption basket. Therefore, depending on thecountry and the consumption habits of the majority of the population, the indexwill comprise different goods.
Some goods might record a drop in prices,whereas others may increase, thus the overall value of the CPI will depend onthe weight of each of the goods with respect to the whole basket. Annualinflation, refers to the percent change of the CPI compared to the same monthof the previous year.From the above graph, we can see that theincrease in price index has linear function with the GDP growth. As the priceof the goods increase, the value of goods sold will be increased resulting inhigher value of GDP. ExchangerateExchange rate is simply the value of oneAustralian dollar(AUD) in terms of other currency normally USD.
Now, let’sfirst talk about the lower exchange rate, when exchange rate is low for AUD,the goods and services in Australia become cheaper for overseas consumer wherethey will have high demand and our export will increase to fulfill that demand.If the export increases it increases the GDP. But when we have strong exchangerate, imports will be cheaper, we will import more goods which makes the GDPlower as the domestically produced goods will have decreased demand. NetexportsNet exports is the value of goods and servicesexported less the imports in certain period of time.
As said above, ifAustralian goods gets cheaper the foreign demand will increase where we need toproduce more, export will increase making growth in the GDP. Also, if we preferdomestic products rather than imports, it will lower the imports making greaternet exports.