A Look At Key Economic Concepts; Australian Indicators

Economics is the discipline within the social sciences that can have multiple definitions. It studies the consumption, distribution and production of goods and services in human society. Besides this, it helps humans take different economic decisions in the face of scarcity. The economics is all about weighing multiple alternatives available to the individuals while taking a decision.

Fundamental Problem of Economics

The scarcity is said to be the fundamental problem of economics as the demand for the resources outweighs their availability. With the growing world population, the demand for the products that can be produced with the available resources also rises. However, the limited availability of the resources raises a need for their efficient utilization.

There are three central problems that are experienced by every country’s economy:

1. What to Produce: Under this problem, one has to decide which goods are to be manufactured and in what quantity. Due to the scarcity of resources in every economy, it is not possible to produce all the goods. The economies should take the decision on the selection of goods based on their importance so that misuse of resources can be avoided.
2. How to Produce: The “how to produce” problem basically focusses on the choice of technique for production. One has to decide on what combination of factors of production is to be used in production. Should the producer use a labour-intensive technique or capital-intensive technique?
3. For Whom to Produce: Another key issue is to evaluate as to who will use the goods or services produced. As no economy can satisfy all the desires of its population, it is essential to choose the category of the population (like rich or poor) for whom the goods will be produced.

The scarcity of water resource has been identified as a major concern in Australia. The sources of fresh and clean water are increasingly becoming scarce in the country due to population growth and economic development. In some cities of Australia, water restrictions have been imposed by the government in order to prevent the exploitation of the resource.

Types of Economics

The field of economics can be diversified into Microeconomics and Macroeconomics. Let us study more about these categories below:

Microeconomics

It is the study of an economic behaviour of individual agents within the economy like workers, businesses, firms, households etc. The study is concerned with the interaction of demand and supply in individual markets for goods and services.

In context of the Australian economy, an improvement in the performance of S&P/ASX 200 index in 2019 has impacted the individual investors’ decisions of investment in the equity market. All these individual decisions are made on a microeconomic front, that when aggregated affect the economy as a whole. Similarly, financial planning by an individual that helps him take prudent financial decisions for the businesses also comes under the microeconomic category. The retirement planning choices made by the retirees also fall under this division.

Macroeconomics

Macroeconomics is the branch of economics where we study an economy as a whole, examining different phenomena like national income, unemployment, inflation etc. The macroeconomic models are used by the government, central banks and organisations to formulate economic policies and strategies.

Let us have a look at some of the recent updates on macroeconomic indicators of the Australian economy:

Consumer Price Index: The consumer price index measures the change in the prices of a basket of goods over time. It shows that whether the economy is experiencing deflation, inflation or stagflation. The effect of a change in the prices of goods and services over time can result in economic fluctuations.

The headline consumer price index (CPI) stood flat at 0 per cent in March 2019 quarter, as reported the Australian Bureau of Statistics (ABS) in April this year. However, the CPI rose 0.5 per cent in the December 2018 quarter. The inflation data missed estimates during the quarter and raised speculations of an interest rate cut back then by the RBA (Reserve Bank of Australia).

Economic Growth: A rise in the economic goods and services’ production volume during a certain period represents the economic growth of a country. It is the most watched economic indicator as it creates more profit for businesses. It is caused by a more efficient use of inputs and the development of new goods and services.

The growth across the Australian economy dropped to a historic low level of 1.8 per cent (Mar Qtr 2018 to Mar Qtr 2019) in March 2019 quarter, declared ABS. It was the weakest such level witnessed since the global financial crisis. However, the Australian economy grew by 0.4% (seasonally adjusted) during the March quarter in chain volume terms relative to December 2018 quarter. The government final consumption expenditure and net exports contributed 0.2 percentage points each to GDP growth.

Unemployment Rate: The unemployment rate is a critical measure of the economy’s state as it has a strong impact on the economy as a whole. If people lose their job, the production of goods and services gets affected that further causes loss to the nation’s income.

The recently released ABS data indicated that the unemployment rate remained unchanged in May 2019 at 5.2 per cent in seasonally adjusted terms. The employed persons improved 42,300 to 12,868,200 with part-time employment advancing 39,800 to 4,075,400 persons and full-time employment rising 2,400 to 8,792,900 persons during the month.

The number of job vacancies rose by 0.3 per cent in Australia over the May 2019 quarter, indicates a new ABS release. The initial job vacancies figure was in line with the recent slowing in other economic indicators.

Retail Turnover: The retail sales elicit positive movements in equity markets as it is a good indicator of the pulse of the economy. If the retail sales are high, the shareholders of retail companies benefit with higher earnings. In contrast, lower retail sales signal a slowdown in an economy.

A recent ABS update suggests that the retail turnover in Australia improved 0.1 per cent in May 2019 in seasonally adjusted terms. The rise was supported by stronger spending in Cafes and restaurants (0.7%) and household goods retailing (0.5%).

Balance on Goods and Services: Another important macroeconomic indicator is the Balance on Goods and Services that is used to measure the relative strength of a country's economy.

The Balance on Goods and Services was at a surplus of 5,745 million dollars in May 2019 in seasonally adjusted terms. The surplus grew $925 million relative to the surplus in April 2019. Also, the exports of goods and services improved 4 per cent or $1,442 million to $41,585 million in May 2019 and imports of goods and service increased 1 per cent or $515 million to $35,839 million.

Decisions on interest rates: The changes in the interest rates by the central bank get passed on to the rest of the economy. With lower interest rates, the loans become attractive and competitive to borrowers. With the loans, the borrowers can spend on multiple goods and services, thereby facilitating the growth of the economy.

Following a rate cut of 25 basis points in June this year, the RBA slashed the interest rates to 1 per cent last week amid weak unemployment level and wage growth in Australia. This was the first time after 2012 that the rates have been reduced in two successive months. The rate cut was done to support employment growth and make inflation target achievable.

Many economists have lowered the forecasts for the Australian economy’s growth in the financial year ahead due to ongoing volatility in the economy. However, the Australian equity market has witnessed a decent surge this year despite numerous uncertainties in the economy.

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