Due to the nature of the tables and figures, they have been placed in the bottom section of this paper. The source of the statistical figures and tables is indicated and any reference made to the figures and tables well referenced.
In the money market, the cash rate represents the interest rate in the market. Over the years, the cash rate in the money market has changed. The data is presented in Table 1 and the graph in figure 1. There have been several changes in the cash rate in this period. From the year’s 1990 to1993, the interest rate gradually decreased from 14 in August 1990 to 4.75 in July 1994. The highest change is a decrease of 1%, which occurred in several months.
However, in August 1994, the rate increased with 0.75% to 5.5% and continued increasing and reached 7.5 % by December 1994. The rate remained unchanged for the whole of the year 1995 only to decrease by 0.5 % in July, November and December 1996 and the same decrease continued in may and July 1997 to reach the rate of 5.0 %. There were no major changes in the year 1998 except a 0.25 % decrease in the rate in December (Reserve Bank of Australia, n.d.).
No major changes were experienced in the year 1999 except a 0.25 increase in the November where the rate reached 5.00%. The rate, however, increased in Feb., April, May and August in the year 2000 to reach a high of 6.25 by August. In the year 2001, the rate decreased over six months to reach a year low of 4.25. However, the rate increased in the years 2002 and 2003, to reach a 5.25 by December 2003. However, there were no changes experienced in the year 2004. The year 2005 saw an increase in the month of March, which was a 0.25 % increase.
In the year 2006, the rate continued to increase by 0.25 % in the months of May, August, and November and reached 6.25 % by December the same year. The 0.25 % increase continued through the August and November of 2007 and Feb and may of 2008. However, in September 2008, the rate decreased by 0.25 % and continued decreasing to April 2009. The rate then increased by 0.25 % in October, November, and December of 2009. The 0.25 increase continued in April, may and November of 2010 but then the rate decreased by 0.5 in the year 2011. The rate continued to decrease and reached a year low of 3 % in 2012. The rate further decreased by 0.5 % in the year 2013 and remained unchanged over 2014 by decreased further by 0.5 % in the year 2015 (Reserve Bank of Australia, n.d.). The rate continued to decrease and by May 20216, the rate reached a low of 1.75 and remained unchanged by July 2016.
Except in the year 2008 where the rate decreased and increased, the rate increased, decreased or remained unchanged over a one-year period. All over the period, there have been 72 changes of interest rates. From a high of 14 in August 1990, the rate decreased to a low of 1.75 % by July 2016.
As presented in figure 2 and table 2, in the period between the years 2007 and 2015, the real GDP growth rates for both Australia and China were highest in 2007 at 3.76 % and 14.19 % respectively. The rate in Australia decreased further in the years 2008, 2009 and 2010 but increased slightly in the year 2011. The rate again increased in 2012 but decreased in 2013 only to increase very slightly in 2014. By 2015, the rate had decreased to a low of 2.25 %. In China, the rate of GDP growth decreased in the years 2008 and 2009, only to increase in 2010 but then continued to decrease to a low of 6.9 % by the year 2015.
In both of the countries, there has been no negative growth rate meaning that the real GDP has continued to grow only at a reduced rate. Over the last four years, the real GDP growth rates in China have been moderate. There have been slight changes in these years. This shows that the economy is still growing but at a moderate rate. In the last three years in Australia, the real GDP growth rate has seen minimal changes. The economy continues to grow at positive but moderate rates. This fact bears out the RBA’s claims in the press release.
The RBA has to be interested in what is happening in China because the two countries have a significant trade agreement. From the fact sheets, Australia exports 32.5 % of its merchandise from China and imports 22.4 % from China. In the services sector, Australia exports 14.9 % and imports 3.2 % from China. Australia exports most of its goods and services to China than any other country. This indicates the significance of what happens in China to the RBA. IF the economy in China does not grow, then exporting decreases and this affects Australia by reducing its exports to China and thus a decrease in GDP.
There is a close relationship between the interest rates and the GDP growth rates of Australia. In 2008, the interest rate reduced slightly, and the real GDP growth reduced slightly. When the interest rate is high, the money supply in the economy is also low due to high interest in bank loans (Auerbach and Kotlikoff, 1995 p 58). This tends to lower economic growth. The slight increase in interest rates from 2007 to 2008 causes a slight decrease in the real GDP growth in the same period.
Business investment is the money put into starting or expanding business with the potential for returns. There have been fluctuations in business investment in Australia over the last five years. The rate of business investment as a share of GDP increased from the year 201 to 2013 but then increased slightly in 2014 only to fall gradually through 2015 to the current period.
Investment is a major component in measuring the GDP. When the interest rates are high, the bank’s interest rates on loans are also high, and this affects business investment in that there is no access to debt capital. The RBA has to be interested in what is happening to business investment because it affects the overall growth of the economy (Auerbach and Kotlikoff, 1995 p 105). The economy grows when money rotates around the economy at a high rate, which is possible through business investment. Increasing the interest rate when the business investment is decreasing can be harmful to the economy.
In the last five years, the household consumption has been fluctuating. The annual growth rate of disposable income increased from the year 2010 to 2011 but reduced in the year 2012. The rate then increased in 2013 only to decrease again in 2014. Both the disposable income and the saving ratio have decreased in the last five years. This can be attributable to the slow growth in the economy.
Disposable income can either buy goods and services or be savings. Consumption is a major measure of GDP as well as savings. When the disposable income is high, there is high demand for goods and services. Manufacturers make more profits and reinvest leading to development in the economy (Pradhan et al., 2014 p 470). In addition, when there is more, there is access to investment capital, which increases the investment component of the GDP. In Australia, there has been a decrease in the disposable income, which affects the consumption and investment components of the economy. This can explain why the GDP growth rate has been decreasing over the last five years.
The nominal gross domestic product is the monetary value of all the goods and services produced in a country over a specific period. It is measured through the measurement of expenditures or income. Real GDP, on the other hand, is the monetary value of all goods and services produced in a country over a period adjusted for inflation. Unlike the nominal GDP, the real GDP can account for the changes in prices and provide a more accurate measure of future economic growth (Kremer et al., 2013 p 876). The measure of real GDP is based on a base year
The difference between the two is that the nominal GDP includes inflation and thus is high than real GDP. The Nominal GDP represents an economy that does not realize any price changes from the base year. Since changes in prices are inevitable, the real GDP is adjusted for the changes in prices and thus a good measure of GDP.
The relationship between the two graphs presented as figure 3 and figure 4 is that when an adjustment is made on the nominal GDP for inflation, then it yields the real GDP. From the graphs, it is clear that the higher the inflation rate, the bigger the difference between nominal GDP and real GDP.
There is a relationship between the interest rates, inflation and GDP. When the RBA reduces the interest rate, the access to bank loans becomes high and, money is pumped into the economy thus increasing the money supply in the economy increasing inflation. When the nominal GDP is adjusted for a high inflation rate, the real GDP is low (Kremer et al., 2013 p 870). From the data, when there is a high-interest rate, the inflation is low. However, a high increase in the GDP growth can lead to an increase in inflation that lowering the value of the currency.
Employment is a situation where a working-age person has a job and is not actively looking for another job. Unemployment is the situation whereby a working age person is not able to acquire a job but is actively looking for one. Labor force participation rate is a measure of the active portion of the labor force in the economy. This includes the number of people either employed or actively looking for a job. As presented in figure 5 and table 5, as the rate of employment increases, the rate of unemployment decreases and vice versa. This shows that as more people gain employment, the number of people actively looking for a job decreases (Australian Bureau of Statistics, n.d.).
It is important to analyze the participation rate because the unemployment rate can include people who are not part of the active workforce. The unemployment rates can be interpreted as the number of people not earning any income thus not contributing to the economy. However, there are those who are not working due to choice and thus are contributing to the economy. The participation rate decreases when the unemployed stop actively searching for a job. In this case, the official unemployment rate will understate the unemployment rate since those who are need of a job but are discouraged from actively looking for one will not be included in the official unemployment rate.
In the press release in June, the RBA decided to leave the interest rate on hold. There are several reasons why the RBA took such a decision. One of the reasons is that the country has trade agreements with China. Most of the country exports are exported to China. Reducing the interest rate would increase inflation and affect the currency, which in turn would affect international trade. Increasing the interest rate, however, would affect the economic development through reduced investment such as business investment. Since there was overall growth in the economy, the RBA thus decided to let the economy takes its course.
Another reason was that inflation in the country has been quite low. Reducing the interest rate would increase inflation through increased money supply and increasing the interest rate would affect the investments. Thus, it was better not to apply any monetary policy on the economy rather let the economic forces take action.
The action taken by RBA was in line with their stated role. The RBA has the mandate to ensure there is economic stability by applying the monetary and fiscal policies to stimulate the economy. By leaving the interest rate on hold, the RBA ensured that the economy was stable.
Tables and Graphical Figures Section
|Table 1: % monthly cash rate from 1990 to 2016|
|Date||Monthly Cash rate target %|
Source: Reserve Bank of Australia Website
|Table 2: Real GDP growth in China and Australia|
Source: World Bank
|Table 3: Real and Nominal GDP|
|YEAR||REAL GDP GROWTH||NOMINAL GDP GROWTH|
Source: Reserve Bank of Australia Website
|TABLE 4: Inflation rates|
Source: Reserve Bank of Australia Website
|Table 5: Employment and Unemployment rates|
|Year||Employment rate||Unemployment rate|
Source: Australia Bureau of Statistics Website
Auerbach, A. and Kotlikoff, L. (1995). Macroeconomics. Cincinnati, Ohio: South-Western College Pub.
Australian Bureau of Statistics, (n.d.). [online] Abs.gov.au. Available at: http://www.abs.gov.au/AUSSTATS/abs@.nsf/second+level+view?ReadForm&prodno=6202.0&viewtitle=Labour%20Force,%20Australia~Jul%202016~Latest~18/08/2016&&tabname=Past%20Future%20Issues&prodno=6202.0&issue=Jul%202016&num=&view=& [Accessed 2 Sep. 2016].
Bond, S., 2014. Corporate Taxation, Business Investment and Economic Growth.
Kremer, S., Bick, A. and Nautz, D., 2013. Inflation and growth: new evidence from a dynamic panel threshold analysis. Empirical Economics, 44(2), pp.861-878.
Pradhan, R.P., Arvin, B.M., Norman, N.R. and Nishigaki, Y., 2014. Does banking sector development affect economic growth and inflation? A panel cointegration and causality approach. Applied Financial Economics, 24(7), pp.465-480.
Reserve Bank of Australia, (n.d.). Monetary policy. [online] Reserve Bank of Australia. Available at: http://www.rba.gov.au/
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