FLUCTUATIONS OF GDP IN AUSTRALIA

QUESTION

a) Collect quarterly and annual real GDP data for Australia from 1996-2010 and provide a table and a chart for each of these two series. Do you see more fluctuations in quarterly data than annual data? Why? Provide answers in no more than 250 words.
b) Identify some reasons of fluctuations of annual real GDP in (a). Provide reasons in no more than 250 words
c) Suppose there is a major disaster in Australia (e.g., floods in Queensland /earthquake in Japan/New Zealand in 2011). What do you expect its impact on real GDP of 2011. Explain in no more than 250 words.
d) If both federal and state governments start major reconstruction works to repair the damages caused by disasters, do you expect an increase or reduction in real GDP growth in the following year? Explain your answer in no more than 250 words.

SOLUTION

Quarterly Real GDP data for Australia from 1996-2010

Annual Real GDP data for Australia from 1996 to 2010(output approach)

There are many fluctuations in the quarterly GDP of Australia if we study these tables and charts and we can easily analyse that these fluctuations are not to be seen at all in annual GDP data of Australia. Rather when we have a look at the annual GDP we find that it has always shown a rise every passing year.

The only reason that can be found over here is that quarterly GDP is the figure we get after every three months of a year, so if the country is facing any natural calamity or recession then by the time government interferes and tries to normalise the GDP for those quarters the GDP shows great dip and after few months when there is recovery due to government intervention it shows improvement and that is why quarterly GDP shows so many fluctuations. Where as in case of annual GDP we calculate it by totalling the consumption, investment, Government spending and export minus import over the year so it always shows a rise as quoted in Australiaonnet website.

It has been revealed in an analysis done by Lauries, K and Mc Donald, J that the government spending has increased its level of spending over the past 35 years which has reflected as the rise in annual GDP. Whereas, in case of quarterly GDP there are many factors which govern the fluctuations.

b) Identify some reasons of fluctuations of annual real GDP in (a).

There are various reasons of fluctuations of Annual GDP and the major one which can be quoted here is the fluctuations in the business cycle of the economy. When the economy fluctuates from boom time to a downwards turn, then moves towards recession and from recession it goes into upturn in the economy and finally the boom time. If the trade cycle undergoes recession period the GDP will definitely fall. It has been found that the annual GDP has always been expanding because the economy of Australia is majorly dominated by service sector and the strong abundance of natural resources make sits exports also stronger. Thus it has shown great recovery within small span of time after recession too.

Thus we can say some of the reasons which can cause fluctuation in the economy of Australia are recession, unemployment fluctuations, changing exchange rates also result in changing GDP, natural disasters can also cause change in GDP. There are some exogenous factors also which cause fluctuations in GDP like finding a new gold mine or growth of population which affects the GDP in a major manner. The bottom line is that the real GDP of any economy is governed by the Aggregate demand and aggregate supply, so whenever the value of services and goods decrease or increase the GDP also fluctuates. Sometimes the recession in other countries also influences the economy of Australia if there is recession in UK then Australia is bound to experience recession too as the exports of Australia will rise which are major contributors of GDP.

c) Suppose there is a major disaster in Australia (e.g., floods in Queensland /earthquake in Japan/New Zealand in 2011). What do you expect its impact on real GDP of 2011. Explain in no more than 250 words.

Since we know that the GDP of one country rather recession in one country will affect the GDP of 2011 very much and very badly. A major disaster in Japan or flood in Australia will cause the GDP to lower down by 0.5% as said by Heath (2011). The reason being the exports from that region of Australia will decrease and many industries which were sourcing their raw materials and resources will face a major problem thus causing decrease in supply and the demand will keep on increasing. This will have negative effect on GDP of 2011.

The floods will destroy the major natural resources like the coal mines or other agricultural resources required by the industries will not be accessed and thus the resource dependent economy will face major downfall. The quarterly GDP for those three months of 2011 will dip downwards. Major disasters like flood will hamper the coal mines of Queensland and thus decrease the export of coal in a major manner. Since the coal mines are open pit mines all the coal fields will get filled with water and damage the railway tracks also, so there will be hardly any supply of coal which is the major energy resource and export commodity. Thus the GDP for the first quarter will be affected very badly in the year 2011.

As suggested by Heath, M (2011) the unemployment rate will also increase because the major source of employment that is the mining companies will suffer due to floods. Thus all these major disasters in and around Australia will play a serious role in slowing down the quarterly GDP , however it is expected to be normal by the year end due to strong private investments.

d) If both federal and state governments start major reconstruction works to repair the damages caused by disasters, do you expect an increase or reduction in real GDP growth in the following year?

Government intervention of both state and federal governments will help in real time rise in or increase in the GDP of the country in the following year. Thus as suggested by Lauries, K & McDonald, J with the help of total government spending the GDP surely returns back to normal rather recovers faster . However the quarter GDP will not show major increase as it will take time to recover and reconstruct the damaged sites and coal mines. However the annual GDP of 2011 will definitely be showing increase in Australia with the intervention of the government.

As per the analysis of Reserve Bank of Australia it has been found that the effects of flood and disaster in Japan are short term like the disruption of agriculture, vital resources and tourism exports. But with the help of reconstruction work by the government the GDP will definitely show a rise in medium term. But all these are short term impacts which can be recovered over a short period of time with the help of government efforts. The long term efforts of the government like the growing demand of resource exports from India and China will definitely boost the economy of Australia by the year end and the country will show a great rise in GDP. Thus with the help of federal as well as state government the railway tracks will be reconstructed the rising food prices will be controlled and the jobless will be reemployed in the reconstructed coal mines thus giving economy a boost and GDP a rise by the year end.

References

• Australian Economy Contracts 1.2% in Q1, Published on 6/1/2011 4:05:49 PM, TradingEconomics.com, Wall Street Journal.

• Australian Public Service Commission 2007, State of the Public Service Report 2006-07, http://www.apsc.gov.au/.
• Australia on net, Australia GDP, http://www.australiaonnet.com/economy-business/gdp.html)
• Commonwealth of Australia 2007b, Final Budget Outcome 2006-07, Canberra.
• Data extracted on 07 Oct 2011 05:42 UTC (GMT) from OECD.Stat, http://stats.oecd.org/Index.aspx?DataSetCode=AEO_AID_FLOWS
• Heath, M 2011, Australia, New Zealand Disasters to slow GDP before 2012 Rebound, IMF says, viewed on 7 October 2011,http://www.bloomberg.com/news/2011-04-11/australia-n-z-disasters-slow-gdp-before-rebound-imf-says-1-.html
• Laurie, K & McDonald, J, A perspective on trends in Australian Government Spending. Viewed on 7 October 2011,http://www.treasury.gov.au/documents/1352/PDF/03_spending_growth.pdf
• Why does the level of economic activity fluctuate?, http://www.siilats.com/docs/keskkoolECON/TRADCYCL.htm

GE97