Economics

Part  I
Introduction
Australia is one of the developed economies of the world that has reflected a strong economic performance over the last few decades. The economic growth has been characterized by a rising level of skilled labor force, declining unemployment and increasing productivity. During the period when most of the countries are struggling to contain inflationary trends, Australia has a low inflation rate and the economy continues to remain insulated from the global influences. The macroeconomic policies of the country are closely monitored by government policies and regulations and this is one of the reasons behind its consistent growth and performance. The subsequent sections provide an analysis of the economic trends and performance of the key indicators.

Australia  economic analysis
Australia is a country cum continent having a vast land area of 7617930 sq km and a population of 22,309,168 (EconomyWatch, 2010). The population growth rate of the country is 2.1 percent in the year 2009. The countrys labor force is one of the primary reasons behind the strong economic performance over the past few years. The country has rich reserves of minerals and natural resources that have sustained its economic growth and development over the years. The country has a strong economy with a GDP rate that is comparable with any of the top four developed countries of the globe (Theodora, 2010).

Australia presently has a balance of trade deficit equal to 1924 million AUD. The country is a major exporter of agricultural products that include wheat and wool, minerals such as iron-ore, gold, energy and liquefied natural gas and coal. It imports machinery and transport equipment, computers, office equipment, and telecommunication lasers. The country has strong trading relations with Japan, China, United States, and New Zealand. (Trading Economics, 2010)

Economists are predicting a 4 percent growth in the Australian economy during the year 2010 in view of the increasing investment and exports in the country. Economic analysis reports from Reserve Bank of Australia have indicated a healthy growth in business initiatives within the country encouraged by the rising consumer confidence levels and improving global conditions. This is visible in the increased volume of exports and growing trade relations between the Asian countries and New Zealand.

Australia is experiencing a stable growth rate and economists forecast that the country will experience increased development in most of the sectors owing to its sound fiscal policies and regulations.

Australia has a sound and practical structure of financial regulations and institutions that provides certainty for business and is open to investment without undue delay. There is a strong, transparent corporate governance system along with business oriented corporate regulation and insolvency regimes (DFAT, 2009).

The low barriers to trade and investment have provided the economy with competitive environment that has spurred growth in production and efficiency in various economic sectors. Information communication and technology (ICT) is a powerful engine that has promoted many business ventures and led to increased efficiency in operations across industries. The government has provided the economic sectors with a strong infrastructure that facilitates easy accessibility to resources (DFAT. 2009).

Theoretical basis of analysis
According to the views of Adam Smith the true wealth of nations does not comprise of monetary strengths but includes the tools and resources that can be used by nations to produce goods of value. According to this classical economic approach excessive consumption cannot sustain a positive economic growth. Instead, increased savings among the citizens is the key to a prosperous nation in the future. The classical macroeconomic policies hence focused on savings and capital accumulation as the primary requirement for sustained economic growth. In contrast to this theory, John Maynard Keynes emphasized that consumption is the key to increasing market demands and subsequent economic growth. The Keynesian economic theories focused on using various monetary and fiscal strategies for increasing aggregate market demand and subsequent consumption in the nation (Romer, 1994).

The classical macroeconomic theory assumes the existence of perfect market conditions driving the prices of goods and services. The theory reflects that no individual buyer or seller can influence the prices of goods and commodities being sold in the market and that entrepreneurs are motivated purely by profits. This theory also assumes that the market forces determine the wages of the workforce. However, such perfect market conditions do not exist in reality and the economic forces governing the industries demand and supply are much too complex.

The Keynesian theory on the other hand, reflects the modern market environment where savings and investment decisions are not related as in the classical theory. The markets prices and wages are influenced by many factors that exist in the economic environment. Global economies are driven by complex market forces that govern the nations ability to produce goods and services that have value in the domestic and global markets. The major economic indicators that are critical to the countrys economic growth and development can be identified as gross domestic product, inflation, and labor trends.

Gross Domestic Product (GDP)
GDP reflects the total market values attached to the final goods and services produced by the country. It is a primary indictor used by most economists and policy makers to evaluate the capability of the nation in initiating new ventures, economic growth policies and financial regulations. The GDP report of any country includes a comprehensive picture of the personal income and expenditure of the economy, corporate profits, national income and inflation (Yamarone, 2007). The gross evaluation of the countrys income and expenditure is useful in providing a benchmark for analyzing the nations strengths and weaknesses. An insight into the countrys GDP figures provide a wide perspective on the national productive capacities, consumer spending on goods and services, investment patterns within the country, and trade pattern (imports and exports). Investment patterns relates to any kind of investment made by private individuals, corporations or government agencies.

The GDP hence is considered a critical economic indicator of countrys growth and output. It provides economic analysts with a wide range of tools for evaluating the present economic conditions and predicting future economic trends. However, a major difficulty in analyzing GDP is the availability of data and its accuracy levels. Collection of vital statistical data necessary for collating a report on a national level is not an easy task and it is a time consuming process (Yamarone, 2007).

Consumer Price Index (CPI) or Inflation
Inflation is a widely used tool by economists and analysts to evaluate the performance of the economy. It takes into the account the current prices of goods and services offered to the consumers in comparative assessment to previous years. The percentage increase in price levels determines the extent of inflation within the economy. In recent market environment the inflation levels of markets have assumed increased significance since it drives the extent of consumerism and its subsequent impact on the productivity levels. Inflation is hence an important determinant of economic growth and development.

Workforce or labor trends
Overall economic prosperity and growth is governed by an efficient and productive labor market that drives market forces and encourages a competitive business environment. The globalization of economies have removed geographical boundaries to expose economies to a liberated and open market forum where information and communications technology, unrestricted flow of data and information play a vital role in promoting cross-cultural work environment. A decade ago business enterprises were largely concentrated in domestic markets and labor markets were strongly regulated by government policies and internal organizational policies that provided the workers with a stable work environment. But with the advent of globalization and market liberalization concepts the labor markets have shifted to a more unstable and insecure grounds since changing market demographics and economic driving forces are bringing in new work culture and pattern. This includes offshoring and outsourcing of work processes as part of their business strategies.

Data analysis
GDP
The country has displayed a strong economic growth over the decades and presently it has an annual gross domestic product 1197197 million in the year 2009 (ABS, 2010).  The countrys GDP growth rate in 2010 is approximately 0.9 percent that is a significant increase from 0.68 percent in the year 2009. The Gross Domestic Product or GDP is an important economic indicator that measures the countrys annual output and income. The graph below provides an illustration of Australias GDP per capita growth during the period 1998-2008 (Trading Economics, 2010).

Graph 1 Annual GDP per capita since 1998 (Source tradingeconomics.com, 2010)

Inflation
The inflation rates in Australia have been relatively lower than some of the other economies across the globe. The graph below illustrates the inflationary trends in the country during the period 1999 to 2009.

Graph 2 Inflationary trend (Data source Australian Bureau of Statistics, 2010)

Unemployment
Employment trends and opportunities in the Australian economy have been rising steadily with improvements in various manufacturing and service sectors. The country has an estimated labor force of 11.44 million. The agricultural sector accounts for only 3.6 percent of the labor force while the manufacturing sector accounts 21.1 percent of the total labors employed. The service sector forms the biggest sector contributing to employment growth and opportunities in the country  the sector presently employs nearly 75 percent of the total workforce. (Theodora, 2010).

The unemployment rate in the country has gone up to 5.7 percent in the year 2009 in comparison to 4.24 percent in the previous year (Theodora, 2010). The sex ratio of the country is 99 males for every 100 females. The increasing number of females is on account of female longevity in comparison to males (ABS, 2010). The country faces an increasing ageing workforce on account of low fertility and increased life expectancy. Over the next several decades, population ageing is expected to have significant implications for Australia including health, labor force participation, housing and demand for skilled labor (Productivity Commission, 2005).

The graph below provides an illustration of the increasing population in the age range 65 years and above in the last 20 years (1989-2009).

Graph 3 Population aged 65 years of more (Source Australian Bureau of Statistics, 2010)
The ageing labor force is a cause of concern for future economic trends and subsequent impact on national productivity. The increasing proportion of the ageing workforce in the country hence requires some measures and initiatives in retaining a productive workforce by industries and various economic sectors. This can be improved through providing adequate health care services to ensure the fitness of the workforce, retention strategies to motivate the employees to increase the retirement age, and suitable educational framework to enable the younger generation to take over challenging roles.

The labor market is strongly linked with the economic growth and development since it has a direct relation to increasing purchasing power parity within the individuals. Market growth and consumption is driven by the existing wage rate and employment levels within the economy. A change in price of commodities is reflected in the form of income effect or substitution effect. Income effect is the change in consumption pattern resulting from a change in pricing of the commodity or services or a change in the consumers income rate. Substitution effect is the change in consumption that results when a price change results in a shift in individual preference to substitute products.
In the event of increase in income the purchasing power of the consumers increases and vice versa. In the labor market, income effect is felt when the wages increase and the labor substitute leisure hours with more working hours to take advantage of the increased wage rates. On the other hand it is can also be assumed that increased wages may result in increased leisure hours since workers will have more dispensable income in hand. In such cases the work hours will be substituted by increased leisure hours to take advantage of the increased disposable income. There are instances when the substitution effect overrides the income effect and this is evident in the form of increased work effort to earn more wages.

Conclusion
The Australian economy as evident from the macroeconomic analysis and performance of key economic indicators has displayed a positive trend in controlling inflationary trends, GDP growth rate and unemployment rates. Contrary to the economic issues faced by other countries in view of the impending global financial crisis the country sustained a steady growth owing to the sound monetary and fiscal policies adopted by the government. The proactive initiatives of the Australian government in formulating fiscal policies and increasing trade relations with Asian countries like China has boosted the economic growth towards a developmental phase. Moreover, the country has reduced its trade dependency on United States and this has been one of the key factors in minimizing the influences of global market upheavals especially during the recent economic crisis. One of the key measures taken by the government in this direction was the interest rate cuts to negate the impact of the crisis. The role of the government in controlling the markets and providing a supportive pillar for subsequent growth and development has ensured a balanced approach towards globalization and liberalizations moves.

Part  II Macroeconomic Analysis
Introduction
In the past few decades the global macroeconomic conditions have witnessed signs of increasing prosperity and market opportunities. Economic development of countries has been vastly influenced by the widespread globalization and market liberalization policies adopted by governments. The trade liberalization has caused many countries to incorporate a lot of structural changes within its economic framework and practices governing market entry and enterprise development. Australia is one of the most stable economies across the globe and has displayed a steady performance of economic growth and development over the past few years. The country has witnessed rapid economic growth over the past few decades. The study provides a macroeconomic analysis of Australia based on Keynesian economic model highlighting the role of key economic indicators and its impact on the economic growth over the past ten years. The Keynesian macroeconomic policies emphasize the positive role of state and state regulations in controlling markets, inflationary trends and money supply within the country. The economic analysis of Australia in this report recognizes labor as the key economic factor that influences markets, prices, and economic growth in the long run.

Key economic indicators  labor market trends analysis
The Australian labor market has grown considerably over the years presenting new opportunities for growth in various economic sectors. The unemployment rate is at 4.9 percent in the year 2009 (ABS, 2010). The Australian labor market has undergone similar changes over the past few decades and this is evident in the increasing focus on skills development and training programs within organizations. The ABS Education and work survey data (2005) observe that organizations are adopting various means to increase the skills of their workforce.

The openings of global markets have exposed the economy to a wide range of job opportunities both in the service sector as well as the manufacturing sector. The past few decades have provided the economy of Australia with the necessary impetus to boost its industrial and service sector towards rapid growth. The increased competitive market environment, influx of new technology and opening of the economy to multinational companies and liberalized trade policies have contributed immensely to the growth of the labor market in this country. The skill levels of the workforce are one of the critical factors deciding the rate of unemployment in the economy. Highly skilled professionals experience lower unemployment prospects in comparison to less skilled workers. Organizations are paying a great deal of importance to training their employees on a regular basis. Unskilled laborers find it difficult to gain decent employment and this is one of the drawbacks of the changes taking place in the labor market across the globe. The Australian Bureau of Statistics (ABS) Report (2010) claims growing employment opportunities in the next five years.

The Australian labor market has provided increased scope and employment opportunity to the masses that has a stabilizing influence on the overall economic growth and development. The positive impacts are visible in the increasing standards of living in the country and growing purchasing power of people.

Chart 1 Inflation rate since 2003 (Source CIA World Fact book accessed from indexmundi.com, 2010)

Low levels of inflation and consumer price index over the past few decades have ensured a strong control over the economic growth and development of the country.

Investment and economic growth
Increased and favorable economic growth is driven by growing consumerism within the economies and an economic environment that promotes market demand through increased opportunities to earn higher incomes by individuals. Global trade is one of the primary drivers of economic growth over the last few decades. The graphs below illustrate the trade statistics in Australia since 2003.

Chart 2 Exports and imports since 2003 (Source CIA World Fact book accessed from indexmundi.com, 2010)
An expansion in trade is marked by increase in employment opportunities and individual income levels. Moreover, growth in trade results in a competitive economic environment that boosts productivity and helps in increasing wealth creation and subsequent improvement in the standards of living. Such economic policies and conditions favor increased inflow of foreign funds and investment that act as propellant to countrys economic growth.

Foreign direct investment (FDI) is a vital factor responsible in boosting the economic growth of a country through its positive impact on the countrys domestic capital, productivity, and employment statistics. It provides the host country with numerous benefits in the form of increased labor standards and skills transfer, new technology transfer and increase in innovative ideas, improved infrastructure and a supportive business environment. It has become a leading source of external financing.

Countries that have stable market conditions coupled with high productivity, low costs of labor, effective government policies and adequate infrastructure facilities are considered to be the most favored destinations for foreign investment companies.

The FDI of any country has provided it with the necessary support to promote economic growth and development. Developing countries having a high economic growth rate that has been triggered by increasing inflow of foreign direct investments, have felt the positive impacts of this trend in creation of increased opportunities for entrepreneurs and skilled employees. Business enterprises are as result offering more wages and compensatory benefits to retain their workforce in the face of growing employment opportunities. The growth in wages has significantly increased the purchasing power of the people leading to growth in consumerism that has fuelled the demand for more products and services in the market. The financial institutions are also offering attractive loans and credit to consumers to tap the booming market conditions. This growth pattern has its downside if left uncontrolled to the market forces. However, increased access of households to credit has meant that consumer spending can increase, even with stagnant incomes, as (rising) levels of indebtedness substitute for (falling) household savings. But as balance sheets adopt smaller margins of safety the system becomes more and more fragile (World economic and social survey, 2008). Such trends and fluctuations in the market conditions can be prevented through adequate government policies and regulatory control as evidenced in the Australian economy.

Economic policy analysis
Government regulations are viewed as supportive pillars for a regulated economic growth and development. This holds much truth in the light of open markets and free trade environment. Unstable and unforeseen changes in the open markets can result in deep seated impacts on the economic conditions that affect all sectors of industry and commerce. It has been evidenced that a free market economy does function smoothly and Hong Kong is a classic example of such a successful economy. Government intervention is minimal in this country and the market has been allowed to automatically adjust to market driving forces. The government control and regulatory hold over monetary and fiscal policies, and labor markets in Australia have enabled a self contained economic growth strategy. The GDP real growth rate chart illustrates the countrys economic growth in the past few years

Chart 3 GDP  real growth rate since 2003 (Source CIA World Fact book accessed from indexmundi.com, 2010)
Experts and economic analysts believe that government intervention in the financial markets should be limited to setting policies, ensuring proper oversight of financial markets, monitoring and enforcement of policies, and building the legal and regulatory infrastructure needed for the private financial markets to operate (Vives  Staking, 1997). Too much of government control and regulation can restrict the healthy growth of financial markets. Adequate government measures and control that allows the financial markets to operate in a free economic environment is ideal for facilitating competitive growth.

Comparative analysis
The government of Australia has consolidated its economic growth through reduced reliance on foreign savings and investment options. The country has witnessed significant increase in FDI inflows over the past few years but this is low in comparison to other OECD countries who have displayed a strong trend towards increasing FDI. The countrys total FDI inflows in the year 2008 stand at US 55.8 billion as compared to US 237.5 billion in the United States (Australian government, 2010). The economic growth and prosperity of an economy is strongly linked with its ability to attract foreign investment through enabling and supportive government policies and regulations.

The current global financial crisis made a severe impact on all sectors of the economies across the world. The United States sub-prime mortgage crisis crippled the major economic powers causing severe setbacks in economic growth and development. During the global financial crisis the market prices had soared and the financial markets witnessed one of the most unstable market conditions. Banks and financial institutions were struggling to survive in such challenging economic conditions. The liquidity crunch affected the banking sector and financial institutions like Lehman Brothers and Fannie Mae had to close down operations as a result. Under such chaotic financial market conditions, the government interventions in the country played a critical role in restoring a semblance of order.

Australia has successfully managed to minimize the impact of the recent financial crisis through adopting a self sustained growth strategy. The country has strengthened its trade relations with China and other Asian countries and reduced its dependency on US for exports and imports. This has insulated the country from the credit crunch effects of the recent economic crisis. Some of the financial and regulatory moves made by the Australian government have made a positive impact on the economic markets of other Asian countries too. Australian government cut the interest rates and this move has greatly assisted the recovery of Asian markets. Market experts believe that the Australian move is expected to insulate the countrys banks, households and firms from the meltdown in global financial markets (domain-b.com, 2008). Hence the country has adopted a well balanced economic growth approach in order to sustain long term economic growth and development.

Conclusion
OECD reports reveal that Australia has boosted its productivity levels through strong regulatory frameworks and sound policies that have helped Australia weather the global crisis better than most OECD countries (OECD, 2009). However, it is also felt that increased focus is required on strengthening the competitive environment within the economy and remove infrastructural bottlenecks to reduce costs of operations and improve profitability environment (OECD, 2009). The states have lesser control on the work force and labor market movements, but such changes are a direct consequence of the government policies and the initiatives launched by government bodies to open its economy to global trade and commerce. The governments in order to facilitate these changes and achieve a more globalised and homogenized approach towards economic growth and development have removed trade barriers and restrictions. Such moves have led to dramatic changes in the macro economic models based on Keynesian approach. The new economic system that has emerged as a result of increased globalization and opening of markets is more complex and challenging to the governments since the paradigm of control over market forces have undergone a radical shift. Economies like Australia have provided a new model of economic growth and development through the perspective of adequate government controls and regulatory influences that have ensured a steady economic growth over decades.