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This document was downloaded from Coursework.Info - The UK's Coursework

Database - http://www.coursework.info/

Contents

1. Introduction...............................................................................................22. Methodology.............................................................................................23. Economic Objectives...............................................................................2

3.1 Economic Growth..........................................................................23.2 Internal Balance.............................................................................3

3.2.1 Full Employment................................................................3

3.2.2 Price Stability.....................................................................33.3 External Balance............................................................................43.4 Standard of living..........................................................................4

4. Economic Indicators................................................................................44.1 Gross Domestic Product (GDP)...................................................54.2 Inflation...........................................................................................64.3 Unemployment...............................................................................74.4 Current Account Deficit................................................................8

5 Macroeconomic Policies..........................................................................95.1 Monetary Policy.............................................................................9

5.1.1 Monetary Policy at work in our economy........................9

5.2 Fiscal Policy...................................................................................106.2.1 Fiscal Policy at work in our economy..............................11

5.3 Effectiveness of Australias Policy Mix.......................................126. Economic Outlook for the future............................................................14

6.1 Coincidental Indicators.................................................................146.2 Leading Indicators.........................................................................146.2 Indicators relating to government objectives.............................15

7. Conclusion................................................................................................158. Bibliography..............................................................................................17



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1. Introduction

Australia has had one of the strongest economies in the world in recent years,more competitive, open and vibrant than ever. Australias strong economicperformance over the past decade has been rooted in strong growth, lowinterest rates and low inflation. It has also been the result of an aggressiveand lively private sector, a skilled, flexible workforce, effective macro-

economic management and on going micro-economic reform. Thismanagement and reform takes the physical form of government policiesknown as monetary and fiscal policy, and government initiatives relating tomicro-economic reform. (Australia Now, 2003)

2.0 Methodology

In researching the Australian economy my main source of information was theinternet. Online I found many informative articles and interviews which haveproven invaluable in my discussion of the economy. I also utilised books fromour school library, classroom notes, textbooks and human sources to further

my understanding of the Australian economy. After having compiled all of myresearch I designed a detailed plan of my analysis and set about writing it.

3.0 Economic Objectives

In order for the government and economists to assess the effectiveness of ourfiscal and monetary policy, they must consider several factors. These factorsare known as economic objectives. They are:

Economic Growth

Full Employment

Price Stability External Balance

The final measure of economic success is that of a countrys Standard ofliving. It is argued, however, that this objective takes into account aspects ofall the other objectives, and should therefore be set aside from them. TheStandard of living objective is undoubtedly the most significant indetermining whether or not an economy is successful. (Alcorn, 2003)



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3.1 Economic Growth

Economic growth can be defined as the sustained increase in the productivecapacity of an economy, usually indicated by the increased availability ofgoods and services in an economy (Alcorn, 2003).

Technically, as an economys labour force grows in size, a change relative tothat growth should be mirrored in the economys economic growth. If this doesnot occur, it will cause unemployment to rise in this way, we can already seethe first signs of a link between this objective and that of Standard of living.Obviously, it goes without saying that if unemployment were to rise, averagestandard of living would drop. (Alcorn, 2003)

The traditional measure or indicator of economic growth is the change per

annum in Gross Domestic Product (GDP). GDP is the total value of finalgoods and services produced within an economy in a given time period. Inmost economies, this indicator is shown in journals, reports, and so on as arealGDP figure. This simply shows the value of GDP after inflation has takenits toll. With changes in the level of GDP, governments can identify andforecast possible changes in the level of economic activity in an economy.(Alcorn, 2003/Bulmer, 2003)

3.2 Internal balance

With economic growth can sometimes can some limitations and undesirableside effects, such as a high inflation rate. Maintaining internal balance withinour economy serves to combat these undesirable side-effects of economicgrowth and ultimately, improve our standard of living. (Bulmer, 2003)

3.2.1 Full employment

The objective of full employment is not quite as misleading and unachievableas it may sound. Whilst one could quite easily make the inference that for fullemployment to be achieved every person in the country would need to have ajob, effectively leaving us with an unemployment rate of 0%. This is not the

case. Full employment can be better defined as that situation wherebyeverybody in the country who wants a job has a job. There will always be asmall degree of unemployment. (Alcorn, 2003)

Unemployment is measured as a percentage of the labour force employed.The labour force refers to the body of individuals within Australia who are ofworking age (that being between 15 and 65) and who are actively seekingemployment. (Alcorn, 2003)



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In any market economy (An economy wherein demand and supply measuresaffect certain variables within the economy) like Australia, there will alwaysexist a number of unemployed people who are either between jobs (frictionallyunemployed) or who have been made redundant through reorganisation ortechnological advances in their field of work (structurally unemployed). Thelevel of unemployment incorporating only these two types of unemploymentand not the others (i.e. Cyclical, Seasonal, Long-term and Hardcore) is knownas the natural rate of unemployment (NRU). In simple terms, we can thereforesay that for an economy to achieve the object of full employment, itsunemployment rate must parallel its NRU. (Alcorn, 2003/Bulmer, 2003)

3.2.2 Price Stability

The conventional measure of price stability is that of inflation. Inflation can be

defined as the decline in purchasing power of a currency. Naturally,governments aim to avoid excessive inflation rates in order to raise thestandard of living for members of society through reasonable price stability.Increased inflation rates can have further dire effects, such as a decrease inreal GDP. (Alcorn, 2003)

The economic indicator used to assess price stability is that of the ConsumerPrice Index, and is defined as the average change in the price of a basket ofconsumer goods and services. These goods and services are weightedaccording to their importance to the average consumers household budget.(Alcorn, 2003)

3.3 External Balance

The external balance (balance of payments) of a nation summarises itsdealings with the rest of the world (including payment to and receipt from)over a period of time (generally one year) (Alcorn, 2003).

Inflows (receipt from other countries) and outflows (payments to othercountries) of money resulting from buying and selling goods and services onthe international market is referred to as a countrys current account. Acurrent account deficit illustrates that a country owes money to the rest of the

world. On the flipside, if a country is seen to have a current account surplusthis means that it is owed money by the rest of the world. To reduce thecurrent account deficit (debt) of a nation, consumers, businesses and thegovernment may be forced to spend less and save more, take a cut in theirincome, postpone expansion or investment projects and slow down economicgrowth. In a case like this, general economic well-being and standard of livingwill naturally fall. (Alcorn, 2003)

3.4 Standard of living



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The final and most important economic measure of success is the objective ofstandard of living. An economys standard of living is measured using avariety of qualitative and quantitative measures. The previous objectives canbe seen as the quantitative measures of an economys well-being. Below arethe qualitative components of this objective:

Standards of health

Food consumption and nutrition levels

Education and literacy

Employment and work conditions

Equity

Degree of independence

Development sustainability

We must bear in mind that there can never be one single measure of standardof living. In order to determine whether or not an economy is successful inproviding a high standard of living, we must consider many factors together,from a more holistic perspective. (Alcorn, 2003)

4.0 Economic Indicators

Below is a detailed investigation into the trends of various indicators over thepast decade. It is imperative that we explore all aspects of these indicators asthey allow us a further insight into the achievement of government objectives,which will ultimately become the criteria on which we assess ourgovernments economic management efficiency.4.1 Gross Domestic Product (GDP)



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Over the last ten years we can note a general upward trend in the AustralianGDP figure. There is a noticeable drop in GDP around 1990 which occurredas a result of the recession which was taking place at that point in time.Together with other countries, Australia saw a general increase in GDPthrough the 1993/94 period. From 1994, Australias level of GDP seems tostagnate, remaining fairly stable. Although we can note many ups and downsthroughout this period, these can be attributed to fluctuations within thebusiness cycle. (RBA, 2002)

The year 2000 was a strong year for both Australian and global growth. GDProse by almost 5%, and growth in major world economies (the G7 see Fig.

1) was about 3%. This growth was led by the US, which enjoyed a verystrong period of growth through the second half of the nineties leading into2000. This growth was not restricted to the US, and many countries, includingAustralia, followed in the United States footsteps (See Fig. 2). Asian nationsgenerally recovered from the economic crisis of 97/98 with several countriesriding the global boom. Towards the end of 2000, however, it became clearthat a slowing down in the US economy was finally beginning to occur. Thisslow down was disguised for a while, but when the events September 11 tookthere toll, there was no question about where the US economy was headed.This slow down in the global economy, coupled with the institution of the GSTin Australia (in 2001), led our economic growth to suffer as well. When the

RBA cut back interest rates by about 2% in 2000/2001 to encourageeconomic growth, underlying inflation crept up, which, in turn, caused RealGDP to decrease further. Thankfully, however, the Australian economy hassince managed to escape the global downturn in economic growth with GDPstanding between 3 and 4% in 2002, predominantly thanks to smart policyinstruments such as the First Home Buyers Grant, which was instituted alongwith the GST. This is evident from Graph 3 (Previous page) which depictsconstruction as the largest contributing sector to GDP for the Septemberquarter 2002 (RBA, 2002/CIT, 2002)



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Finally, we must bear in mind the fact that often with strong growth comes ahigh level of inflation. In Australia, however, we can note that our strongeconomic growth has been accompanied by low inflation rates. Australiascompound average inflation over the 1990s was 2.26% compared with theUS inflation rate of 2.9% and it is arguable that this shows a degree ofsuccess within the governments management of our economy. Australiaseconomic growth, albeit it slower in recent years, is a definite strength of oureconomy, and policy instruments which encourage further growth (especiallyin the housing sector) will ensure stability within this aspect of our economy.(Australia Now, 2003)

4.2 Inflation

Since 1992, Australias inflation rate has remained at a fairly stable level,again experiencing high and lows at the hands of the business cycle (See Fig.4). In 2000, Australias CPI shot up from approximately 2.5% to between 5

and 6 percent. This increase was effected through the Reserve Bankstightening of monetary policy in response to increased oil prices in late 1999.Tax reforms such as the goods and services tax (GST) further upped inflation,raising it to approximately 6%. By the end of 2001, however, inflation haddropped back to 3.1%. Since a further drop in mid 2001 to 2.5%, economistshave noted a steady increase in inflation. Increases in 2001 can be attributedto the September 11 events and the collapse of HIH (a major Australianinsurance firm) and Ansett (Australias second largest airline). These upwardCPI movements were, however, offset by a significant decline in petrol prices



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due to a fall in global oil prices, and so, were not as severe as expected. In2002/2003 inflation is again seen to wander beyond the borders of the reservebank target inflation rate of 3%. These recent fluctuations in inflation,however, have occurred due to the drought which Australia is sufferingthrough at the moment. This has led to drastic increases in the price of fruitand vegetables which consumers are forced to sustain. Whilst this may beseen to lower Australias populations standard of living and show ineffectiveeconomic management on the part of the economy, it is arguable that thisslight increase in inflation was inevitable due to the onset of the drought, andif one was to examine Australias underlying inflation rate (Fig. 5), one mayfind the situation to be far more manageable. Underlying inflation hasremained fairly stable over the past few years, and is still within its target bandtoday. Real inflation rates may distort this image through the consideration ofthe drought. It is argued that without taking this aspect into consideration, the

government has done very well to have kept underlying inflation within itstarget band so successfully. For this reason, it is argued that inflation is astrength of the Australia economy. (Australia Now, 2003/APEC, 2002/RBA,2003)

4.3 Unemployment

Dating back ten years, Australias unemployment was very high (Fig. 6 A).Being a lagging indicator, we noted the effect of the 1990/91 recession as theeconomy went into a recovery stage in 1993. Unemployment rose toapproximately 11.5%, a far cry from the governments objective of fullemployment. A value of between 5 and 6 percent is deemed reasonable forthe Australian economy, as the government has stated that anunemployment rate of 5% is achievable (Prince et al. 2002). Unemployment



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then set about on a slow decline in the rest of the 1990s, reaching a low of6% in 2000. This steady decrease came as a result of solid economic growthfor the early part of the 1990s and the subsequent increased spending byfirms and industries which allowed further jobs to be created (Prince et al.2002). Unfortunately, slow economic growth in 2000/2001 through a slowdown in the global economy led to a lagged rise in unemployment to 7.2% in2001/02. Thankfully, however, a stronger rate of growth in 2001/2002 has ledto the unemployment rate to be dragged back down to 6.1%. Australiasunemployment rate has been a great strength of the economy over the lastfew years, as we have seen a gradual decline in it for a long period of time. Ifthis decrease could be sustained even longer, unemployment could arguablybecome the greatest strength in our economy. (Bulmer, 2003/APEC, 2002)

4.4 Current Account Deficit



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The current account deficit (CAD) has become a contemporary watchpoint forforeign investors. Australias CAD reflects our nations ability to fund its owngrowth, or its reliance on foreign investment into our country. Obviously, werely on foreign saving because national saving is not sufficient to fundnational investment. For the past two decades, Australias CAD has averaged4. 5%. In the 1980s, Australia borrowed heavily to fund our CAD, and thisincreased our foreign debt dramatically. Interest charges on our new debtsthen increased the net budget deficit which then became the largestcomponent of the CAD. In 99/00 Australias CAD was $33.5 billion, $18.7billion in 00/01, and $22.2 billion in 01/02. In the December quarter of 2002,Australias trade deficit stood at its largest ever, up 40% from the previousquarter, at $11.6 billion (This is depicted in Fig. 7 on the previous page).Fiscal policy is the closest related government form of management in terms

of CAD, and it is arguable that the volatility of this figure over recent yearshas been as a result of bad debt management on the part of the governmentthrough inappropriate fiscal policy approaches. Australias current accountdeficit has been, unquestionably, its greatest flaw, and needs to be managedin a far more professional manner. (Anderson, 2003/Bulmer, 2003/AustraliaNow, 2003)

5.0 Macroeconomic Policies

Macroeconomic objectives of the government can be achieved through 2forms of government policy, monetary policy and fiscal policy. (Alcorn, 2003)

5.1 Monetary Policy

Monetary policy aims at influencing the level of interest rates in order toachieve the desired economic objectives of a country. Monetary policy istoday effected by the Reserve Bank of Australia (RBA) which is independentof government control. Whilst in theory this may be seen to be true, the bulk ofemployees sitting on the board of directors are government appointed.(Bulmer, 2003)

Australias monetary policy aims to ensure that inflation remains low and that

the swings of the business cycle are kept under control. Ultimately, monetarypolicy is aimed at ensuring internal balance by stabilising aggregate demandand controlling inflation. (Bulmer, 2003)

5.1.1 Monetary policy at work in our economy



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In 1993 the RBA adopted a target for monetary policy. This target was tomaintain underlying inflation to a rate between 3 and 4 percent, and it isargued the government has done well to realise this objective (Fig. 9). Theearly 90s saw a high inflation rate, predominantly as a result of the 90/91recession. CPI remained fairly constant, around the 2.5% mark until the mid90s. Fears of an accelerated inflation figures in the period between 1994 and1996 prompted the Reserve Bank to raise interest rates (See Fig. 8). Thecash rate stood at 7.5% at the end of 1994. Until 1996, it stayed at this level the RBA then declared the inflation had fallen enough, and with the slowingdown of the Australian economy in 1996, the RBA cut the cash rate back to

6% in an attempt to encourage economic growth. In 1997, the RBA cut backthe cash rate a further 1% to 5%, where it remained until late 1998. This wasa move to try to increase growth further than previous expansionary moves in1996 had allowed, however it did not have the effect the RBA were lookingfor. The financial crisis in Asia led to a further reduction in cash rate to 4.75%amidst fears that problems in our major export markets would produce asignificant slow down in economic growth. Finally, in November 1999 the RBAtightened monetary policy, raising the cash rate to 5%. The RBA had sincetightened monetary further to a peak of 6.25% before it was once again easedback to approximately 4.15%. Finally, after having lifted the cash rate to4.75% last year, the RBA have maintained interest rates in the second half of

2002 and the first quarter of 2003. In a recent statement, they cited the weakglobal economy and the Australian drought as factors against increasinginterest rates further. (Bulmer, 2003/Axiss Australia, 2003)

5.2 Fiscal Policy

Fiscal policy comprises adjustments of government income and expenditurein, thus making the main instrument of fiscal policy the Federal Budget. The



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aim of fiscal policy is to achieve a desired level of economic activity within ournation. It has three roles, those of allocation, distribution and stabilisation.(Alcorn, 2003)

The policys allocation role ensures that economic resources are allocatedefficiently across the various sectors of the Australian economy. This can beachieved by various means, for example taxing particular goods or services.Generally, this facet of fiscal policy aims to decrease the allocation ofresources to the production of demerit goods, these goods being those whichcan cause a ripple of ill effects to arise from their production. An example of ademerit good is cigarettes, as it can cause discomfort for people who arearound the consumers of the good. Another example of the policys impact onresource allocation can be seen through the ability of the government toindirectly legislate against the production of certain demerit goods if the social

costs of production outweigh the social benefits (For example, legislationsurrounding pollution). (Alcorn, 2003/Bulmer, 2003)

The distribution role of the policy is very simple, and influences the way inwhich goods and services in Australia are shared between people. This wouldinclude such things as wages and salaries. Basically, this role is achievedthrough the implementation of income taxes and transfer payments to thepoor and needy. (Alcorn, 2003/Bulmer, 2003)

The stabilisation role is submitted to be the most substantial role that fiscalpolicy plays in our economy. It is this aspect of the policy which the

government utilizes as a tool to achieve its short term objectives of fullemployment and price stability. This component of fiscal policy is split into twodistinct sections, those policy initiatives which are automatic, and those whichare as a result of deliberate government intervention. Automatic stabilisers arethose elements of the policy such as income tax and welfare benefits whichoperate automatically, independent of government action. Discretionary fiscalpolicy is any deliberate action taken by the government in an attempt tostimulate or reduce aggregate demand AD. (Alcorn, 2003/Bulmer, 2003)

5.2.1 Fiscal policy at work in our economy



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Over the past decade, the effectiveness of Australias fiscal policy has beennotable, with the economy having been pulled out of a budget deficit in thelate 90s (See Fig. 10). Following the 90/91 recession, discretionary fiscal

changes were seen to be fairly substantial, as a result of the failure ofmonetary policy to slow rising unemployment rates at the time and the onsetof the recession. In 92/93 the government adopted expansionary fiscal policy(in the form of increased spending and decreased taxation revenue), and thisled to an increase in GDP by 3.2% (Fig. 11). This, in turn, allowed Australia toemerge from the recession in 1994 and growth for the country remained fairlystable at around 4.1% for the next three years. The government, amidst fearsthat the economy (and hence, GDP) was growing too rapidly, then decidedthat aggregate demand needed to be reduced, and fiscal policy wastightened.The government adopted contractionary fiscal policy, and this, in conjunction

with automatic stabilisers, caused the cash deficit to drop by 2%. In 96/97growth fell below 4% as a result of contractionary fiscal policy, andunemployment rose to 8%. The year 97/98 brought no problems for Australia,despite the Asian financial crisis perhaps a testament to Australias floatingexchange rate, having proven itself as an insulation measure against crisisssuch as this. This was the first year in the 90s in which Australia did not havea budget deficit. In 2000/2001, GDP dropped to 1.9% and inflation rose to 6%- this was, obviously, at the hands of the GST. In this year, the governmentagain eased fiscal policy, and the budget surplus grew to 2%. By 2002,



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government initiatives such as the First Home Buyers grant had taken theirtoll, and the budget deficit lay at around 0.2% of GDP. (Lewis et al. 2002;Prince et al. 2002; Gittins et al. 2002)

5.3 Effectiveness of Australias policy mix

In terms of monetary policy, one can base their judgment as to theeffectiveness of the policy by establishing whether or not the policys goalshave been achieved. As previously mentioned, the RBAs aim was to reduceinflation to a sustainable level, between three and four percent. Obviously, theonset of a recession in the late 80s led to a dramatic increase in the CPI ofAustralia, however, once the government set its goal in 93 to maintain CPI, it

is submitted they have done well to come very close to achieving that goal.Unfortunately, however, the RBA has been slow to move from contractionaryto expansionary policy in the later years of the 90s. Its interest rate cuts havealso been less than those of the US Federal Reserve Bank, however this maybe as a result of prioritising Australias inflation rate, which is near the top if itstarget band. (Bulmer, 2003)

In relation to fiscal policy, the policy stance has changed from focusing onexternal balance to a focus on internal balance. The policy has taken focus offthe topic of increasing savings to reduce CAD pressures, as saving is nolonger the priority it once was. Whilst this is not necessarily a bad focus-shift,

one must consider the possible effects lower GDP (as a result of the drought)will have on our CAD this must be reviewed to ensure it does not get out ofhand. Overall, however, it is submitted that the policy has achieved its focusto a certain degree near the end of the 90s and into the present day. Policyinitiatives and careful government planning have allowed the nations budgetbalance to be fairly stable in recent years, proving the strengths of our fiscalpolicy. In relation to one of fiscal policys main objectives, that ofunemployment, one can note that unemployment is at its lowest in years, andthis can, for particular reasons, be as a result of smart management on thegovernments part. (Bulmer, 2003)

On a whole, in deciding whether or not the governments policy mix has beensuccessful or not, we must consider whether or not the governmentseconomic objectives have been achieved. In terms of economic growth,Australias real GDP figure has fallen marginally over the past few years, andwill arguably continue to fall as a result of the drought. We must bear in mind,however, the impact that certain global events in recent times. Incidents suchas the September 11 attacks have caused a global economic downturn toensue. For this reason, it is submitted that the government should have afinger pointed at them for poor economic management. It is submitted that



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independent events (such as September 11, the introduction of the GST etc.)have caused GDP to fall slightly, and this is no fault of the government. It isargued smart policy initiatives such as the first home buyers grant haveensured stability within our economy of late, and will prove to be fundamentalin the success of the Australian economy in the future. (Australia Now, 2003)

Whilst full employment itself has not been achieved, the probability of seeingany country achieving this objective in its entirety remains infinitely small, andit is submitted that Australia has claim to one of the best unemployment ratesworldwide. Whilst our country may not be seen to have the lowestunemployment rate in the world, it has proven to be continually decreasing,and we have not seen any sharp upturns in unemployment over the lastdecade. It is hereby contended that it is successful implementation of certainallocation measures of fiscal policy which have allowed for this constant

decrease in unemployment since the recession of the early 90s. (AustraliaNow, 2003, APEC, 2002)

Price stability over the last decade has been fairly well regulated through theimplementation on monetary policy. The Reserve Bank has a very fine degreeof control over the CPI of Australia, and whilst they are often slow to adjustmonetary policy, they have generally, over the past 8-10 years succeeded inkeeping inflation within the boundaries of its target band, that being between3% and 4%. (APEC, 2002)

Australias CAD remains an issue of much contention, having been fairly

volatile over the past few years. Whilst Australias CAD has pointed towards ageneral decline over the past two decades, signs point towards an increase indebt following a global down turn in world economies and a decrease innational saving as a result of events such as September 11. This decreasehas led to an increase in the reliance on foreign investment, and this is afundamental weakness in our economy. (APEC, 2002)

Australia is categorised as a first-world-nation, and our standard of livingstands to prove exactly why. In terms of the final, and arguably mostimportant, economic objective, the government is achieving its goal very well.Statistical measures such as the mortality rate in Australia have continued to

decline over the past few years, showing a higher standard of living.Contrasting this, other statistics have increased, such as the life expectancyof Australians. In males, Australia has the second highest life expectancy inthe world, and in females, the third. This further substantiates the fact thatAustralia has a healthy workforce, arguably through economic investment intothe health and general standard of living of Australian citizens. Educationlevels also remain at a very high standard in Australia, further establishing thefirm foundation of which our future workforce is based. Unfortunately,however, household disposable income and consumer sentiment have fallen,



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indicating insecurity in the Australian market. It is argued, however, that as aresult of government measures to invest in the future of our economy (throughhealth/education), consumer confidence will return. This return in confidencewill in turn cause spending to increase, leading to increased GDP, and finally,increased disposable income. (Australia Now, 2003)

6. Economic outlook for the future

In attempting to predict the future state of our economy, it is necessary toexamine the main indicators of a governments economic objectives and anyother relevant indicators, grouped as coincidental indicators and leadingindicators. It is submitted that lagging indicators are irrelevant to thisdiscussion as they depict an image of the past rather than a foresight into the

future. (Ozyildirim, 2003)

6.1 Coincidental indicators

Coincidental indicators afford us an insight into the current workings of oureconomy, and should therefore be considered first. The coincidental index is

merely a weighted combination of the five most important coincidentalindicators. The coincidental index of Australia has been increasing over thepast year, showing positive signs for the future. In particular, retail trade (Asdepicted above, Fig.12), company profits and new vehicle registrations havestood out, showing increased consumer confidence within our economy.These are very healthy signs, and show that the Australian economy isperhaps reaching the end of a recovery period and is headed towards aboom. Unfortunately, however, this will undoubtedly be combated by the



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drought, which may take its toll on GDP in the very near future. (Ozyildirim,2003)

6.2 Leading indicators

Leading indicators are the economists crystal ball a far greater insight intothe future than any other indicators. As would be expected, a move in aleading indicator would effect a similar move in the economy very soon after.An example of this in practice is a case wherein the supply of money in thecountry increases. This increase in the leading indicator of money supplywould cause household gross disposable income to rise, which would in turnlead to increased spending and hence, growth. Evidently, this makes themvery valuable in the process of predicting economic performance. The leadingindex, like the coincidental index, is a group of weighted leading indicators (in

this case, eight). (Alcorn, 2003/Ozyildirim, 2003)

Unlike the coincidental index, however, the leading index has suffered a slightdecline of approximately 0.1% in recent times. This occurred in January 2003and was the first fall in this index in seven months. This was, arguably, anunusual occurrence, and can be attributed to, as Ozyildirim states, a sharpdrop in building approvals coupled with weakening rural goods exports.Reductions in the amount of rural goods exported can be accredited to thedrought. The agricultural sector is thought by Peter Costello to be the onlyunderperforming sector of our economy, as non-farm sectors of the economyare expected to continue to grow solidly. The drop noted in building

approvals is indicative of a lack of consumer confidence in our economy.(Ozyildirim, 2003)

6.3 Indicators relating to government objectives

Whilst the Australia economy does seem to be slowing down, we are notexperiencing an economic downturn, but rather a slow down in a veryconsistent recovery over the last ten years. In relation to economic indicatorsrelating to government objectives, this means many things. In terms of GDP,the drought will undoubtedly have an impact, however, will be sustained bythe rest of the economy. With overperforming sectors such as the construction

sector forming the basis of our growth, GDP is still predicted to rise theapproximately 3.75%. Unemployment is predicted to drop by approximately1% in 2004. This is substantiated by Anderson who states that jobadvertisements are up 3.2 percent this shows vacancies in the workforcewhich will inevitably be filled. Unfortunately, Australias CAD will only increasein 2004, as a result of a drop in exports and an expected rise of 10% inimports (Allan, 2003). This will obviously create a budget deficit which will leadto greater foreign debt. As a result of this, fiscal policy is likely to adoptcontractionary policy. Monetary policy should remain fairly constant for the



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moment. As the economy reaches its peak and begins to decrease, however,the RBA will adopt an expansionary stance in relation to monetary policy, andwill lower interest rates. In relation to the final government objective, therefore,CPI will decrease initially as a result of a break in the drought and the returnof agricultural goods to lower prices. In the longer run, however, as the RBAease monetary policy, CPI will rise once more. (NOIE, 2003/Anderson, 2003)

7. Conclusion

As has already been discussed, the Australian economy has experienced asustained period of recovery over the last ten years. This recovery period isnearing its end, suggesting that the economy is nearing a boom period. Theindicators of GDP, CPI, Unemployment and CAD have been discussed and

with exception of the latter, have all been found to be strengths of theeconomy. Arguably, with careful fiscal policy management in the future, CADcan also become a strength for Australia. In terms of monetary and fiscalpolicy, the RBA and government respectively are doing an excellent job ofmanaging our economy, with the exception of foreign debt, which fiscal policyneeds to target in the future.

The future seems to be bright for Australia, with growth expected in spite ofthe recent drought. This can be attributed to a lively and productive housingand construction sector, which form a solid foundation on which oureconomies growth is built. Unemployment is also set to improve as is the

price stability of our economy. As previously mentioned, however, CAD is stillan area of concern. Ultimately, however, the Australian economy is headed inthe right direction and should remain a world-competitor for years to come.



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8. Bibliography

Internet sources

1. Anon. 2002. Australia Political and economic profile. CIT PublicationsLtd.http://www.cit-online.com/dat/aus_a1.htm

2. Anon. 2002. Economy Report Australia.Asia-Pacific EconomicCorporationhttp:// www.apecsec.org.sg/member/memberecreport/aus.html

3. Anon. 2003. The Economic Outlook. Reserve Bank of Australiahttp://www.rba.gov.au/PublicationsAndResearch/Bulletin/bu_mar03/bu_0303_2.pdf

4. Anon. 2002. Economic Performance and Issues in 2002. ReserveBank of Australia

http://www.rba.gov.au/PublicationsAndResearch/Bulletin/bu_mar02/bu_0302.pdf



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