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Explain Theories in Macroeconomics

University: Melbourne Business School

  • Unit No: 4
  • Level: Undergraduate/College
  • Pages: 5
  • Words: 1250
  • Paper Type: Assignment
  • Course Code:

    R/508/0522

  • Country: AU
  • Downloads: 1
Question :

The international Monetary Fund stated that wage growth rate is weak and inflation rate is below the target range thus risk factor is to be identified.

  • Provide introduction of macroeconomics
  • Carry out discussion about low growth in Australia
  • Explain theories in macroeconomics
Answer :

INTRODUCTION

Macroeconomic is an essential branch of economics that deals with performance, behavior and decision-making of a nation as a whole. It focuses on aggregate modification in an economic such as unemployment, growth rate and gross domestic products. As per the mentioned case study which is associated with increasing wage rate by the central banks for everyone is being discussed under this report. There are various types of theories related with macroeconomic are used to analyses all implication associated with the nation. By the help of various charts and graphs the understanding and ability to evaluate topical issues are showed effectively (Boserup, 2017).

TASK

Discussion of low wage growth in Australia:

Wage growth rate has provided a great importance about the implications for the macro economy. Wages are the most source of household income and the more component of the business costs, and have important implications for the consumer price inflation. Wage growth has reduced in current years which has come to the least pace since 1990s, as per the wage price index. Wage calculated along with the higher period of low wage growth since 1990s recession. Throughout these calculations, rate of the annual wage growth is reduced to about 2-3 percent.

The slowing down in wage growth has emerged alongside higher growth in the labour productivity. This also asset to moderate growth in the labour productivity. This can likewise assist to moderate growth in the labour costs for the organisations, beyond the influence of lower wage growth. Growth during the market growth in the labour cost of manufacturing of diverse output such as unit labour costs or ULCs has likewise reduced significantly since 2012. Infect, level of ULCs have been less changed for higher than the three years (Pigou, 2017).

Currently low wage growth does not common to the Australia. Globally, wage has been lower than the forecasted for various developed economies in the recent years, covering where labour markets which have tightened considerably. Diverse factors which have aimed to elaborates this weakness, covering trends which have taken for few time and also have emerged in the general reduction in the labour share of income. Although, reduction in the wage growth in Australia has been seen in the recent years.

Diverse factors which have been appeared to elaborate highly reduction in the Australian wage growth, and these are elaborated in the remainder of such article. There are so many factors which have emerged to elaborates about the lowering in Australia wage growth. There are so many critical factors appear to elaborates intense highly of the reducing in Australian wage growth, and these are elaborated in the remainder of this article. There has been in enhance in spare capacity in the labour market, and forecasting of future consumer price inflation which have reduced to be the below average (Freeman, 2013). Inflation in the output prices in current years which has been specifically subdued, in them ore part which have owing to the lesser terms of trade and reduction in the mining investment in the current years means that economy needs a lower actual exchange rate that has been in part delivered by the low wage growth. A statistical model explains that these components does not completely elaborates the extent of reducing in wage growth.

Risk of Low wage growth in Australia

Theory 1

Aggregate Demand and Aggregate Supply

Aggregate Demand and Aggregate Supply is one of the essential aspect in macro-economic factors. There are some essential key points are considered in this theory which helps to demonstrate the subject in split form. This basically relates the decisions which are made about quantity to supply based profit and expected to earn.

Aggregate supply is considered as a total output firms which will produced and sold in the other words and the real figure of GDP.

Increasing aggregate supply curve indicates towards upward sloping which is also considered as a short run aggregate supply curve. It basically helps to show the positive relations between the price and the level of real GDP in short run (Atkinson and Stiglitz, 2015).

Price levels for outputs are recorded as increased while the price make the level at various levels. Opportunities for additional profits are also encourages for more production and enhanced sales graph.

It is considered that the aggregate supply graph not only helps to determine the price level but also enhanced GDP and full employment GDP.

Theory 2

Unemployment

As per report published by RBA the unemployment rate is 5.6% in February on a seasonally adjusted basis. It is expected that the unemployment rate in mid-2020 as 5.25%. as per forecasted report it is projected that the low growth rate is one of the main reason for of increased unemployed rate. Apart from low wage rate, increasing petrol prices are also one of the essential aspect in terms of unemployment rates (Tietenberg and Lewis, 2016).

Theory 3

Inflation: Australian wages rate growth has been getting weaker as from longer period of time. In accordance with increase in inflation the wages rate of employees would get reduces up to a definite level. The sharp rush and fall in the terms of trade had a valuable effect on economic growth an any nation. During past few year backs, central banks forecast for wage rate which have been more persistently too strong. Inflation expectation are taken into account through using a specific tends that are associated with mix of long term survey and financial market measures of estimated inflation. Long term inflation expectation uses to determine more effectively that is best fitted than shorter term inflection.

The GDP deflector consists to collect all necessary changes to growth in firms’ overall prices. This can be motivated that labor productivity and producer real wage. The modification in unemployment rate is consists to capture the wage growth pressure from quick changes to the rate of unemployment at the time of global financial crises. In case spar capacity gets underneath the tipping point a company have to take decision to pay maximum offers to hire people and pay initially increasing again and inflation pick up.

wages price index

Non-tradable inflation

3.5

1.5

3.1

2.4

3.6

3.1

3.7

2.2

3.6

4.2

3.8

4.1

3.5

4.5

3.6

3.5

3.8

3.8

3.5

3.5

3.6

3.4

From the above charts, it has been seen that wage price index and inflation are inversely related with each other. As wages rate is fluctuating at constant rate in accordance to this inflation made maximum impacts on the economy of Australia economy.

The RBA

As per statistical report it is seen that the people of Australia wants to rise their wage rate and waiting for a long time. It is expected that the labour growth rate will be increase till 2020 and the reports were released by RBA officials. As per forecasted results it is seen that the central bank is taking quite a bit estimation in respect of expect wages to go. Wage rates has been increasing gradually as per statements issued by RBA.

There are some theories are made in respect of risk of low wage growth theories such as

Wage fund theory

This is the main theory which was given by Adam Smith (1723-1790). this theory basically remain associated around assumption as workers are paid out of pre-determined funds for wealth. Demand for labour and rate of wages remain depend on the size of wage funds. As per the funds it is considered as a large wage and vice versa (Brue, McConnell and Macpherson, 2016).

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