in Australia they account for grade inflation

College entry is based on your grades in 6 core classes. Your grades in year 11 and year 12 in those classes determine your "Overall Position" or OP for short.

Kids do take standardized tests, but the standardized test scores are aggregated across the entire school and used as a basis for normalizing each schools grades. For example, if you average a B in year 11 and year 12 Physics, but your school has a higher aggregate performance on the standardized test than the rest of the country, your grade would be raised to a B+ or an A- to account for the difficulty of the school. The final OP is a formula based on your position in your class and your school's position relative to other schools in Australia.

The system tries to combine the best of both worlds. It realizes that day-to-day performance against your peers is a better metric, but also realizes that being average in a very talented peer group also has merit over being the highest performer in an average peer group.