Introduction

The following assignment discusses Australia’s real macroeconomic key indicators over a period of time, particularly 1990 till 2017. The key economic indicators included for the study are Australian Exchange Rate, Exports and Imports of goods and services, Cash Rate or Interest Rate and GDP. Further, GDP has been converted to Real GDP using annual GDP deflator so as to get more accurate picture. Hence, all of these factors have been analysed over a period of time. 

Further, the impacts of these factors on net exports has also been analysed through use of descriptive statistics and data analysis tools so as to understand key factors that impact the Net exports.

As can be seen, most of the above factors are inclined towards trade balance and impact of exchange rate and interest rates on the same. Hence, the report will also discuss the impact of changes in monetary policy towards net exports and how monetary policy can be utilised to improve the net export balance.

Part 1: Relationship between Variables

The requisite data was gathered from World Development Indicators database (WorldBank, 2020). The bulk download allowed the file to be exported for all countries. Using filters, Australian economy and required key economic data was collected as follows:

1. GDP: GDP in Current US dollars was used for the period of 1990 till 2017. The same was converted to billions for ease of analysis.
2. GDP Deflator: GDP Deflator (Base Year 2018: 100 value) was used for the period of 1990 till 2017.
3. Real GDP: This was calculated by dividing nominal GDP in (1) above by GDP Deflator in (2) above for the period of 1990 till 2017.
4. Exchange Rate: Official exchange rate (LCU per US$, period average) was used for the period of 1990 till 2017. The Data was converted to AUD1/USD by taking reciprocal.
5. Exports: Exports of goods and services (current US$) was used for the period of 1990 till 2017. The same was converted to billions for ease of analysis.
6. Imports: Imports of goods and services (current US$) was used for the period of 1990 till 2017. The same was converted to billions for ease of analysis.
7. Net Exports: This was calculated by subtracting Imports in (6) from Exports in (5) above for the period of 1990 till 2017.
8. Cash Rate: Lending Interest Rate was used for the period of 1990 till 2017.

The below graph and table present the values as calculated and sourced (WorldBank, 2020):

Net Exports as share of Real GDP & Exchange Rate

For purpose of this section, Net Exports were divided by Real GDP to get a ratio and the same was compared with the exchange rate:

The descriptive statistics were generated as follows:

It can be seen that average exchange rate was 0.76AUD/USD with the rate ranging from minimum of 0.52AUD/USD to maximum of 1.04AUD/USD across 28 years from 1990 till 2017. The standard deviation from mean was 0.13.

It can be seen that net exports as a percentage of Real GDP averaged at -0.73 with the ratio ranging from minimum of -2.15 to maximum of 0.89 across 28 years from 1990 till 2017. The standard deviation from mean was 0.84. This indicates that net exports were negative for majority of periods indicating imports exceeded exports. The net exports were negative in 22 years out of a total period of 28 years which has been analysed.

The regression is performed as follows:

It can be seen that multiple R or correlation in this case is 0.08 indicating weak positive relationship. The regression equation can be interpreted as y = -1.14+0.54x where y is the Net Exports (% of Real GDP) and x is the Exchange Rate (A$1-USD).

Net Exports as share of Real GDP & Cash Rate

For purpose of this section, Net Exports were divided by Real GDP to get a ratio and the same was compared with the lending interest rate:

The descriptive statistics were generated as follows:

It can be seen that average cash rate was 7.94% for the analysed period of 1990 till 2017 with the rate ranging from minimum of 5.25% to maximum of 16.35% across 28 years from 1990 till 2017. The standard deviation from mean was 2.47%.

It can be seen that net exports as a percentage of Real GDP averaged at -0.73 with the ratio ranging from minimum of -2.15 to maximum of 0.89 across 28 years from 1990 till 2017. The standard deviation from mean was 0.84. This indicates that net exports were negative for majority of periods indicating imports exceeded exports. The net exports were negative in 22 years out of a total period of 28 years which has been analysed.

The regression is performed as follows:

It can be seen that multiple R or correlation in this case is 0.07 indicating weak positive relationship. The regression equation can be interpreted as y = -0.93+0.03x where y is the Net Exports (% of Real GDP) and x is the Cash Rate.

Part 2: Regression Analysis

For purpose of regression, the dependent or y variable is the net exports as a percentage of Real GDP while independent or x-variables include factors such as, net exports, real GDP, exchange rate, and cash rate. The regression is performed with output as follows:

It can be seen from above that the value of R is ver`1y high at 0.96 with adjusted R square being 0.91. This indicates the least squares regression equation as follows:

y^{^} = -0.39 + 0.09 x₁ + 0.06 x₂ - 0.62 x₃ + 0.02 x₄ 

where,

• Dependent variable, net exports as a percentage of Real GDP is represented as: y^{^} 
• Independent variable, Net Exports (USD Bn) is represented as x₁ 
• Independent variable, Real GDP is represented as x₂ 
• Independent variable, Exchange Rate (AUD1-USD) is represented as x₃ 
• Independent variable, Cash Rate is represented as x₄ 
• The values of R and R² help in determining the degree of relationship between independent and dependent variables. These are also called as Coefficients of Determination.

In the given case, R value is 0.96 which indicates that there is high degree of correlation between the variables in consideration. R² is at 0.93 with adjusted R² being 0.91. The value of R² is nothing but the proportion of change in dependent variable that can be explained through the independent variables. As can be seen, at 93%, very high proportion of change in value of y-variable can be explained through above considered x-variables.

Part 3: Monetary Policy Impact on Net Exports as a Share of Real GDP

A country goes through various business cycles, such as, peak, recession, contraction, expansion etc. The key economic indicators of the country, such as GDP, inflation, unemployment, exchange rate, etc. also undergo a change during such cycles. However, the central bank can influence or impact the indicators through two types of policies so as to get desired impact. These two types of policies are known as fiscal policy and monetary policy.

Fiscal policy refers to use of taxation policy or change in government expenditure so as to get desired impact (Afonso and Sousa, 2011 and Kasabeh, 201 and Lane 2007). When economy is facing recession, expansionary fiscal policy is used that includes tax cuts and increasing government expenditure that helps to open up the economy (Gondor, 2014 and Nelson and Singh, 1998). When economy is expanding aggressively, contractionary fiscal policy is used that includes increasing taxes and decreasing government expenditure that helps to open up the economy (Kramer, 2019 and Miller et al., 1997). 

Monetary policy refers to influencing the interest rates in the economy and controlling money supply in the economy so as to get the desired impact (Antonio et al., 2019). When economy is facing recession, expansionary monetary policy is used that reducing the interest rates that help to open up the economy (Goodfriend, 2002). When economy is expanding aggressively, contractionary monetary policy is used that includes increasing the interest rates that helps to open up the economy. Usually, the monetary policy aims to impact inflation (Yeyati et al., 2010 and Alvaro and Philips, 2007)).

Under expansionary monetary policy, the interest rates are kept at low levels that help in increasing aggregate demand and GDP (Moolio et al., 2015). Purchasing power increases and capital expenditure increases when interest rates are low and people are able to borrow funds at a lower rate. Increase in aggregate demand includes net exports also. Additionally, such a policy may cause decline in exchange rates and also increase in inflation due to aggressive activity. This will lead to lower real GDP. In effect, net exports as share of Real GDP will increase under expansionary monetary policy (thebalance.com, 2020).

Conclusion

The regression analysis indicated that Net Exports as a percentage of real GDP can be predicted through regression equation with variables net exports, cash rate, exchange rate and real GDP and the linear regression as able to predict more than 90% of the change in predicted variable.

Hence, the above report analysed various macroeconomic indicators. It was noted that as exchange rate declines or interest rate declines, net exports increase. The expansionary policy leads to higher inflation which in turn, indicates lower real GDP due to higher GDP deflator.