As per the circular flow of income, the exchanges take place by way of money and the goods and services. The circular flow of income leads to good knowledge of a nation's economy. The circular flow of income represents the flow of money from individuals and business. Individuals make expenditures and buy goods from the business (McClure and Thomas, 2019, p.45). The money that is obtained by the business is used for reinvestment and similarly business provides goods and services creating a demand in the economy. Apart from this, the individuals provide their labour force to the businesses and in turn, they get money. They partially spend the money to buy goods and services and partially save it in banks that again provide loans to the businessmen. In this way, the economy operates. So, as the business would become reluctant to spend money, the circular flow of income would get affected as individuals do not get goods and services. From the foundations of the circular flow of income, the national income takes place.
According to the reserve bank, the global economy is vulnerable to the downside risk. The Reserve Bank adopts a suitable monetary policy as per the needs of the economy. According to the Reserve Bank of Australia, there are certain important risks. The two important risks are:
The risk of decline of the foreign trade market along with potential investment is one major risk. The Reserve bank of Australia has told about the trade war between the United States and China have very caused uncertainty to business and after the trade war, many businesses in the country and the globe are reluctant to invest proceed with any sort of investment plans (Beeson and Bloomfield, 2019, p.335). Their set back of spending and a motive for disinvestment may affect the future growth of the nation’s economy. Keeping in mind the circular flow of income, as the businessmen aim for disinvestment the employment opportunities may be affected and there would a decline in demand and growth. Under such circumstances, the individuals or the households will not be able to get money through their labour force and as they do not get the money they will not have a spending capacity. So, the fall of investment and the lack of employment is one of the risks leading to unemployment and a stubborn low unemployment rate.
The other risk is the fall in the interest rate and the inflation rate. As per the Reserve Bank of Australia, the interest rates are low around the globe and inflation is relatively low. The is stagnancy in the price of goods and services. The returns from the government bonds are adversely low in many other nations and Australia. The rates of loans are also very low and the Australian dollar has fallen to a great extent. This shows that there is a fall in the exchange rate. Exchange rates are the price value of the domestic currency concerning another nation. So as AUD has a low exchange rate at present the imports for the country will become expensive. The fall in the inflation rate will cause a decrease in demand and a stagnancy situation to the Australian economy because inflation is mandatory for suitable growth of the economy (Cross, 2019, p.174). Moreover, as inflation has been low there would be no sort of demand as investment perishes and economy of Australia is hurt. Finally, the interest rate on long term bonds refers to the return on the Australian government securities and as they fall the price of the Australian long term securities will also fall. In this way, people are not going to invest in the bonds and no investments will come in the market and the total Australian economy will move into stagnations which is another risk referred to by RBA.
In the Australian between June 2019 and September 2019, Australia, the economic growth in terms of GDP ranged between 0.4 to 0.6 % (Naisbitt et al. 2019, p.34). The growth has slowed from the revised 0.65 within the previous quarter. With June 2019 to September, there was an ease in government spending. To analyse the economic growth of Australia between June 2019 and September 2019, there are a variety of macroeconomic variables. The possible macroeconomic variables to comment about economic growth in Australia are:
Government spending- According to the statistics, government spending had risen about 0.9 % within the third quarter against 2.5 per cent in the second quarter that ended in June 2019. Such spending was related to national defence comprising of 3.9 %, known defence 1.8% but the consumption of state and the territorial government have fallen by about -0.1% (Miyamoto et al. 2019, p.144).
Household consumption- As per statistics values, the amount of household consumption have raised by 0.1%. The growth in household consumption was the least against the 0.3% expansion in the last quarter (Loukoianova et al. 2019). Within the household consumption, the health services consumption have increased by 0.9 %, recreational consumption increased by 0.5%, insurance and services and food have risen by 0.3% but hotel services, transport services etc have decreased (Loukoianova et al. 2019).
Capital formation- The amount of capital formation has gone down about 0.2% that was lower as compared to a 0.5 % decrease within the June quarter.
The stock of goods- The number of inventories decreased to about 941 million Australian dollars caused by the fall of the retail business and the government inventories (Castellares and Salas, 2019, p.33).
Export and imports- The export and the imports have taken an advancement of about 0.7% against 1.3% in the second quarter (Bandara et al. 2019, p.1). This was due to the rise of the mineral substances that had faced a set of through coal.
Production- As told by Munkh-Orgil (2017), the production aspect mining has slowed by 0.7 information technology 0.8, scientific goods by 1.3, food by 0.1 per cent, houses on rent and the housing by 0.2% general administration along with public safety by 1.2%. On the other hand, the production output had fallen in fishing by 2.1%. The output of within the manufacturing sector has contracted of about -0.6%, wholesale trade of about -0.7%, transport and warehousing services about -0.4% but in social care, the output has increased of about 2.6% and support services about 1%.
Considering all these, macroeconomic variables, the economic growth of Australia between 2019 June to September was 1.7%.
With the expenditure chain volume measures, the different sectors have contributed to economic growth. The sectors that have contributed to the economic growth between September 2018 to September 2019 are the general government and the household sector. It also includes gross capital fixed formation by the dwellings and the ownerships, known dwelling construction, machinery and equipment, certain biological goods, IP goods. It also includes any sort of modification in the level of inventories and the export and the import of the goods etc.
The household sector has contributed about 1.2% from September 2018 to September 2019The government sector have contributed about 6% so the total final consumption expenditure sector has contributed about 2.5% (Nguyen and Wang, 2019, p.5). The private dwellings have detracted. The ownership dwellings have detracted of about -15.8% and the dwellings have the detracted about -9.2% (Baker et al. 2019, p.40). The son- dwellings construction have detracted of about -5.2% but the machinery and equipment have contributed about 1.8%, biological goods have detracted of about -0.8% whereas the IP under the capital formation has contributed about 6.7%, the public capital formation has contributed about 0.1%. So under the capital formation sector, there is an overall detraction of -3.5%. The gross national expenditure has contributed to about 0.5% and the export has contributed 3.7% whereas the imports of the country detracted -2.0%. Finally, the gross domestic product has contributed 1.8% within September 2018 to September 2019.
Figure 1: (expenditure chain volume measures) Source: (https://www.abs.gov.au/)
A transfer payment is a payment that is made by the government without any consideration. It is generally the opposite of the factor payment (Wenlin and Kunrong, 2012, p.5). Transfer payments are generally the unemployment allowances, old age allowances and other government subsidies that are called to be the single-sided payment. Generally, transfer payments are given by the governments to support the individuals. Similarly, the new start payment is also a form of the transfer payment that would help the unemployed to find proper food, shelter and bear up with the minimum living cost to survive. The decision to increase the new start payment from 277.85$ in a week to 3.70$ that can rise to 50% out of the minimum wage (Clarke, 2018, p.11). The aggregate expenditure model includes the different components of the spending that are the consumption, investment, government purchases and finally the net exports. It states that when the price level is kept fixed in the short run, the amount of spending created through the model states about the level of the economic activity. The aggregate expenditure model gives an analysis of the circular flow of income or called the real GDP under which it tells about three different aspects like the production for the companies, the earnings of the individuals along with the whole amount of spending upon the firm's output (Habanabakize and Muzindutsi, 2017, p.224). It also puts a focuses stating the link in between the Gross domestic product along with the individual spending.
According to the assumptions of the aggregate expenditure model the amount of planned spending will obviously depend on the amount of money that is earned by an individual along with the production within a nation’s economy because when individuals in the households get greater amount of income, they will have a tendency to spend more (McCombie and Thirlwall, 2016). Apart from these, companies go for enhancing the production when they form up sufficient capital. When income increases the consumers within a nation will crave for foreign goods. Moreover, the negative relation of net export cannot set off other positive relations therefore with an increase of the income the planned expenses of an individual will also get to increase.
Figure 2: Aggregate expenditure model Source: (https://www.google.com/)
So, with the increase in transfer payment initiative in Australia called the New Start from 277$ a week to 370$ will have a positive impact (Bakker and Demerouti, 2017, p.273). As a positive impact, it will increase the living standard of the unemployed people as they will have greater money in their hands and they can get to increase their purchasing power. As GDP is equal to planned spending and planned spending depends on the amount of income of an individual the spending capacity will increase causing a rise in the GDP, so as GDP rises, the nation Australia will reach towards economic growth in terms to higher GDP. In this way, the Australian economy would be positively affected or the increase of transfer payment has a positive impact.
Apart from the positive impacts, the increase in the transfer payment called the Newstart will hurt the Australian economy. The Australian economy will be negatively impacted because according to the aggregate expenditure model, individuals or households will get to spend more when they have higher money in their hands. In addition to this, the model tells that when household or individuals have a greater amount of income in their hands, they are going to crave much more of the imported goods (Bajada, 2017). As imported goods demand rises the exports will fall as per the rule of the aggregate expenditure model and the Australian economy may face a lot of budgetary deficits in their current accounts because the nation will have to make more and more imports. Budgetary deficits are not healthy at all for a nation's economy. In this way, the increase in the transfer payment will negatively impact the Australian economy.
Apart from this, as individuals have more money they are going to crave for useless goods as per the rule of the model and as a result the aggregate demand rises to such an extent where the supply cannot be increased so there will be an inflationary pressure in the nation’s economy and hence the Australian economy will be negatively impacted (Cao et al. 2015).
So the change of the transfer payment should not occur. If the change occurs the Australian economy is going to rise and lift its present low inflation rate but in the long term, the excessive inflation rate is going hurt the economy. If the change is very necessary and is supported by the different Australian departments then the change should be made otherwise not.
Bajada, C., 2017. Australia's Cash Economy: A Troubling Issue for Policymakers: A Troubling Issue for Policymakers. Routledge.
Baker, E., Lester, L., Beer, A. and Bentley, R., 2019. Australian geography of unhealthy housing. Geographical Research, 57(1), pp.40-51.
Bakker, A.B. and Demerouti, E., 2017. Job demands-resources theory: Taking stock and looking forward. Journal of Occupational Health Psychology, 22(3), p.273.
Bandara, Y.M., Sharma, K. and Chakrabarty, D., 2019. Trends, patterns and determinants of production sharing in Australian manufacturing. Economic Analysis and Policy, 62, pp.1-11.
Beeson, M. and Bloomfield, A., 2019. The Trump effect down under US allies, Australian strategic culture, and the politics of path dependence. Contemporary Security Policy, 40(3), pp.335-361.
Cao, L., Hosking, A., Kouparitsas, M., Mullaly, D., Rimmer, X., Shi, Q., Stark, W. and Wende, S., 2015. Understanding the economy-wide efficiency and incidence of major Australian taxes. Treasury.
Castellares, R. and Salas, J., 2019. Contractual imperfections and the impact of crises on trade: Evidence from industry-level data. Journal of International Economics, 116, pp.33-49.
Clarke, R. (2018). Newstart report debunks Morrison's misers. Green Left Weekly, (1197), 11.
Cross, J., 2019. On the reduced macroeconomic volatility of the Australian economy: Good policy or good luck?. Economic Modelling, 77, pp.174-186.
Habanabakize, T. and Muzindutsi, P.F., 2017. Analysis of Government Expenditure and Sectoral Employment in the Post-apartheid South Africa: Application of ARDL Model. Journal of Economics and Behavioral Studies, 9(2), pp.224-233.
Loukoianova, M.E., Wong, Y.C. and Hussiada, I., 2019. Household Debt, Consumption, and Monetary Policy in Australia. International Monetary Fund.
McClure, J.E. And Thomas, D.C., 2019. The Impact of New-Product R&D on the Circular Flow. The American Economist, 64(1), pp.45-59.
McCombie, J. and Thirlwall, A.P., 2016. Economic growth and the balance-of-payments constraint. Springer.
Miyamoto, W., Nguyen, T.L. and Sheremirov, V., 2019. The effects of government spending on real exchange rates: Evidence from military spending panel data. Journal of International Economics, 116, pp.144-157.
Munkh-Orgil, T., 2017. Mongolia's Economic Security: How can Economic Development Further Support Mongolian National Security through Developing its Mining Sector. US Army Command and General Staff College Fort Leavenworth United States.
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Nguyen, V.H. and Wang, J., 2019. The Australian Economy in 2018–2019: Convergence in Economic Activity across Australia. Australian Economic Review, 52(1), pp.5-18.
Wenlin, F. and Kunrong, S., 2012. Equalizing Transfer Payment and the Structure of Local Government’s Expenditure [J]. Economic Research Journal, 5.
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