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New Zealand is well positioned to handle the economic issues as the country is imposing various schemes and regulation for development of the economy. In comparison to other OECD countries, New Zealand came up from financial crisis in a strong position. Some of the economic issues that New Zealand is facing include poverty, unequal income distribution, housing affordability and high housing prices. The most important issue that New Zealanders face is homelessness (Perkins et.al, 2018). New Zealand well-being is high but in some dimensions country is weak such as low earnings and low productivity, housing affordability and uneven resources distribution.
New Zealand economy is developed but is small in the marketplace. The country standard of living of New Zealanders is mainly based on the agricultural products but from last few years the country showed slow growth from all the developed economies. New Zealand has a long history of government interference in economy from insurance and banking institutions to social security system. Some of the key challenges are unstable economic growth, poverty, corruption and housing affordability. The country is facing problem of housing from a very long time. Further, labor productivity is weak in the country as labor productivity of New Zealand in 1991 labor productivity was 70 and in 2017 it declined to 60 (Edert et.al, 2017). In comparison to OECD countries, US amongst leading country in labor productivity and New Zealand are at last. Whereas perceived corruption in the country is low. New Zealand had a history of high net immigration. Immigration is high and the country is dependent on high skilled to improve economy.
Housing affordability and higher housing prices represent a major burden to New Zealand as 45% of income of people absorbed for households by bottom quintile and for top quintile 15% of income absorbed in households. Housing quality to low income New Zealander is poor resulting to inadequate insulation. Housing investment rose in the country in between 2011 and 2016 as the housing affordability law changes. The labor market in the country is tight and showed highest unemployment in 2018. Unemployed people increased in 2018 because wage growth in the country remains lower. The main challenges that the country is facing is related to the housing, poverty, unequal distribution of the income between rich and poor and increasing unemployment rate from the past years (McEwan, 2018).
Macroeconomic policies that are recommended by the OECD analyzers are for improving the well being of the country by framing sound macroeconomic policy. The macroeconomic policy is focused on improving health and education well being in the country. The inflation rate under monetary policy remains at 1.5 percent. Looking into the problem of housing prices, OECD analyzed that household debt exceeds the OECD average due to that they recommended to tighten the bank lending standards. This policy slowed the mortgage credit and relaxation on some housing regulation led to lower inflation in housing sector. “The Reserve Bank has imposed macro-prudential restrictions on loan-to-value ratios since 2013”. For solving the issue of deposit insurance, OECD said that deposit insurance can bring financial stability as well as consumer protection (Brunow et.al, 2015).
The country fiscal policy became expansionary because of expenses on health and infrastructure. Fiscal policy of country leads to low government debt and decline share of GDP. As per OECD suggestion, the government is working towards “Independent Fiscal Institution” under that the government formed tax working group to develop the tax system of the country. OECD recommended introducing a comprehensive capital gains tax which can bring benefits to the country by incurring some cost. Exempting people for family home reduced the housing prices but to some extent and not impacted greatly on the overall housing affordability problem of the country. OECD also recommended “expanding the coverage and rate of the Waste Disposal Levy, strengthening the Emissions Trading Scheme and advancing the use of congestion charging for roads”(Stiglitz et.al, 2009). Macroeconomic policy of the country is not balanced and not effective to handle the economic shock. Fiscal policy of the country is helpful to handle the inflation and demand pressure. But fiscal policy can be coordinated with monetary policy to get the most and better outcome for the growth of the economy (Bodenstein et.al, 2019).
By analyzing the OECD recommendations and its benefits this can be related to “Keynesian economics theory”. This theory focused on the expansionary fiscal policy as suggested by OECD to improve the condition of the economy and to reduce the housing prices. The interference of government in the economy in order to increase dead is the concept that covered in Keynesian theory. The main tools that are in hand of government to control demand are expenditure on education, infrastructure and to bring employment opportunities. On other side classical theory focus on the laissez faire policy and promotes free flow of goods and services in economy in order to self-regulate demand and supply in the economy (Castelnuovo,. and Pellegrino, 2018). Fisher effect theory can also be related to the suggestions given by OECD that was to increase the interest rate in order to control housing inflation. Fisher effect theory describes the relation between interest rate and inflation rate. In this both the interest rates are includes; nominal interest rate and real interest rate. OECD recommended to increase the interest rate in order to control the rate of inflation as interest rate increases on loans, people tend to get less loans from the bank, this will reduce the supply of money in the market, less money supply means low purchasing power and people power of money spending will decrease that bring inflation into control. Further, this theory is also applicable in case of international market; this model can be used in foreign exchange analysis. This model can be useful for New Zealand to increase the foreign investment in the country so that economy of the country can develop and grow (Doan et.al, 2015).
OECD recommendations for migration, income equality, labor productivity, housing and growth of economy all are based on the Keynesian theory and requires government interference as the suggestion are based on expansionary fiscal policy. Further, few more recommendations are given to improve housing supply in the country that are rectifying urban problems, establishment of a national housing and urban development authority, improving Kiwi build programme and extension of capital gains taxation to properties (Bodenstein et.al, 2019). The recommendations by OECD are somewhat beneficial for the country and solved some of the problems related to labor productivity and minimum wage and housing prices.
By considering all the problems that New Zealand is facing related to economic growth, housing and immigration and labor productivity. The recommendations given by OECD are effective for the country and focused on changing fiscal and monetary policy. In order to improve housing affordability, OECD recommended adopting spatial planning, reframing resource management act and limiting the deductibility of losses. In addition to that it is recommended that government should provide relaxation to low income group to get housing loans and should develop schemes to provide housing for all people in New Zealand. Further, the government should increase its expenditure for giving more employment opportunities to people by focusing on changing or reframing the business policies and making more stable migration policies. So that more skilled people can attract to New Zealand. As focusing on business policies can bring more foreign investment in the country and leads to more employment opportunities.
Bodenstein, M., Guerrieri, L. and LaBriola, J., 2019. Macroeconomic policy games. Journal of Monetary Economics, 101, pp.64-81.
Brunow, S., P. Nijkamp and J. Poot (2015), “The Impact of International Migration on Economic Growth in the Global Economy”, Handbook of the Economics of International Migration, Vol. 1B, http://dx.doi.org/10.1016/B978-0-444.53768-3.00019-9.
Castelnuovo, E. and Pellegrino, G., 2018. Uncertainty-dependent effects of monetary policy shocks: A new-Keynesian interpretation. Journal of Economic Dynamics and Control, 93, pp.277-296.
Doan, T., D. Maré and Iyer K. (2015), “Productivity spillovers from foreign direct investment in New Zealand”, New Zealand Economic Papers, Vol. 49/3, pp. 249-275, http://dx.doi.org/10.1080/00779954.2014.945229
Égert, B. and P. Gal (2017), “The quantification of structural reforms in OECD countries: A new framework”, OECD Economics Department Working Papers, No. 1354, OECD Publishing, Paris, https://dx.doi.org/10.1787/2d887027-en.
Funke, M., Kirkby, R. and Mihaylovski, P., 2018. House prices and macroprudential policy in an estimated DSGE model of New Zealand. Journal of Macroeconomics, 56, pp.152-171.
McEwan, E.K., 2018. The National Policy Statement on Urban Development Capacity: An effective tool to improve housing affordability in New Zealand? (Doctoral dissertation, University of Otago).
OECD, (2019). OECD Economic Survey New Zealand June 2019. Accessed From: https://www.oecd.org/newzealand/
Perkins, J.O.N., English, M.D., Nieuwenhuysen, J.P. and Rowe, J.W. eds., 2018. Macro-economic Policy: A Comparative Study, Australia, Canada, New Zealand and South Africa. Routledge.
Stiglitz, J., A. Sen and J. Fitoussi (2009), Report by the Commission on the Measurement of Economic and Social Progress,
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