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Interpreting Economic Data Essay

Introduction Section 1 of this report will begin by analyzing the current state of the Australian economy with particular respect to ‘Real” GAP. Definitions on ‘Real’ GPO will be provided, along with the method by which ‘Real’ GAP is calculated. Section 2 – will focus on a detailed explanation of monetary policy, and the ways in which the ARAB have utilized the tool of money supply policy (financial aggregates) to impact the Australian economy. Most of the data for this section comes directly from the ARAB website. Section 3 – investigates inflation and the impact that price growth can have on nonuser spending.

We will also outline the relationship between ‘Nominal’ and ‘Real’ inflation, and the consumer price index (ICP), and also provide the basis upon which ICP is calculated. And how each of the economic measures relates to our future outlook. Recap and Conclusion – the final element of this report will summaries the findings of the analysis. Current and relevant data has been gathered from various sources to support all claims made. Section 1 – Real GAP Growth: ‘Real’ GAP is a measure of the economic output of a country taking into account the effects of inflation.

In order to

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calculate ‘Real’ GAP we first have to establish ‘nominal’ GAP for a given period. Nominal GAP is a calculation of total output for a given year, and is based on the prevailing prices during the year of production. ‘Real’ GAP is what nominal GAP would have been if there was no price changes from the base year. Having established ‘nominal’ GAP we can then use a deflator (measurement of inflation since the base year) to calculate the ‘Real’ GAP. That is, to ascertain ‘real’ GAP, we are required to adjust ‘nominal’ GAP so that it reflects only changes in output, and not the hangers in price.

Real’ GAP is also referred to as constant-dollar GAP (Layton, Robinson & Tucker 2012). ‘Real’ GAP is an important key economic indicator because in order to

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get an exact change in total output for a given period compared against a base year which effectively removes the inflation elements. If we relied simply on ‘nominal’ GPO then it might seem like the economy is producing more, when it’s really Just prices going up. Figure 1. 0 – Australian Real GAP and Inflation: [pick] Source – Comparing Asset Management – ‘A Guide to the Markets’, June 30th 2013

As can be seen from the graph above – Australia’s ‘Real’ GAP (and Inflation rate) output could be defined as being reasonably consistent looking back over a 10-11 year period to 2002. The 20 year average for ‘Real’ GAP is 3. 5% and our latest figures (1 IQ 3) show Australia’s ‘Real’ GAP currently sitting at 2. 5%. Section 2 – ARAB Monetary Policy: The ARAB (like most central banks) is able to influence the overnight cash rate by carrying out open market operations to alter money supply. By using these policy tools to change the money supply the ARAB has been gradually reducing interest rates in the Australian economy since 2008.

I loco-12 I Ides-12 I Total Growth CAGY 16. 7% The data table above demonstrates how the ARAB has gradually increased the money supply (aggregates) into the Australian economy over an 18 month period to June 2013. Coupled with this increasing money supply, we have also witnessed the corresponding, and expected, interest rate cuts (see Figure 1. 5 on page 7). According to the website – Index Mind – the stock of broad money grew from $1. 501 trillion in 2011, to $1 . 708 trillion in 2012 (source – wry. Undermined. Com. AU/Australia) Figure 1. 2 – ARAB – Expansionary Money Supply [pick] Source – ARAB, www. Arab. V. AU, Gauge 2013 Through expansionary monetary policy, the ARAB has lowered interest rates in Australia. Lower interest rates will typically stimulate increased investment, which increases aggregate demand, price levels, real GAP and employment. Section 3 – Inflation: Inflation is simply the measure of an increase in the overall average level of prices and not an increase in the price of any specific product (Layton, Robinson & Tucker 2012). Related to movements in inflation rates in Australia are now considered central to our economic performance, as they can have direct or indirect impacts on all Australians.

High levels of ‘inflation’ can have some significant consequences for the Australian public (and businesses) with respect to individual overall wealth, purchasing power and incomes. Inflation effectively reduces income or purchasing power, and this can lead to changes in spending habits (household consumption levels) which often leads to significant impacts on our GAP and the overall economic performance of the country. Monetary policy has been used to great effect in recent years, in keeping inflation within its target. The current rate of inflation in Australia (as at June, 2013), as measured through the ICP, is 2. …… Well within the target range outlined by the ARAB. How is inflation calculated? The most commonly used method for measuring inflation is the Consumer Price Index (or ICP) also known as the ‘cost-of-living index. “The ICP is simply a measure of the changes in the price of this basket as the prices of items in it change” (ABS website, 2013). ICP is calculated using the prices of a sample of representative items whose prices are collected periodically, but it only includes consumer goods and services – purchasers made by business or Government are not included, nor does it factor any exported items.

Calculating ICP for a single item: Where 1 is usually the comparison year and CHIP is usually an index of 100. ‘ In Australia, the Australian Bureau of Statistics (ABS) prepares the ICP figures quarterly (most other COED nations report monthly), using a “weighted base year” for comparison to current figures. Whilst some do argue that ICP is not a perfect measure of inflation, it remains the current method by which the Australian Government and ARAB (via ABS) measure price increases throughout the economy.

It is vitally important that Australia’s monetary and fiscal policies can continue to keep inflation (ICP) ‘in check at or around he target levels of 2-3%. The Australian economy is in a strong position relative to many of our trading partners, and the rest of the world in general. Whilst many may believe that the mining sector boom has driven the success of our economy for the past decade, allowing us to successfully traverse the SGF, a strong case could also be argued that our success is more attributable to sound economic policy development and implementation.

Testament to this statement is the fact that the then Treasurer Mr. Wayne Swan was awarded the prestigious finance minister of the year award in 2011 for his handling of the Australian economy. The award is Judged by leading European banking and finance magazine Rooney on advice from global bankers and investors. The Labor Government, and Mr. Swan, presided over the economy which grew while most of the world’s developed economies stalled.

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