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Using an appropriate diagram, explain the concept of a stable economic equilibrium and provide your assessment of whether or not the chineseeconomy are all currently at a stable equilibrium.

Understanding Equilibrium in Economics

In economics, market is defined to be the forum for interaction of the demand and supply side agents, for the purpose of buying and selling of various goods and services. The term “Equilibrium”, thus, in the economic sense, represents the situation where the demand and the supply side players reach to a mutually agreed position regarding the price and quantity of product or service the concerned market is dealing with, such that none of the players from either side has any incentive to deviate (Baumol & Blinder, 2015). Equilibrium is said to be stable if even after deviation from the same due to any exogenous force, the economy again comes back to the equilibrium situation with the help of its own dynamics. Taking this into consideration the assignment tries to discuss the economic concept of stable equilibrium, thereby taking reference of the current economies of Australia, China and the USA, analyzing the status of the equilibrium (if any) prevailing in these economies.

As discussed above, the concept of equilibrium can be explained with the help of the following figure, where the demand, the supply-side dynamics, and their mutual adjustments are shown:

 

Figure 1: Equilibrium in the economy

(Source: As created by the author)

From the above figure, it can be seen that the demand and the supply curves interact with each other and reach to a mutually agreed situation at point E, where the curves intersect each other. E therefore is known as the equilibrium point, with the equilibrium price being P0 and the quantity being Q. However, if there is any deviation in the price level, upward or downward, there arises excess supply or excess demand in the market respectively. This in turn either compels the producers to decrease their price (as in case of excess supply) or increase the same (in case of excess demand), thereby bringing back the economy to E in both the cases. This implies that E is a stable equilibrium point.

The same, which is shown in a microeconomic sense, is also applicable for the macroeconomic situations, which is explained in the following section.

In the macroeconomic scenario, the demand side is represented by the aggregate demand curve and the supply side is determined by the aggregate supply as macroeconomics deals with the economy as a whole and not any discrete individual. The process of attaining equilibrium, however, remains the same, that is through the process of mutual interactions of the demand and the supply side dynamics (Nicholson & Snyder, 2014).

Equilibrium in the Macro and Micro Economic Scenarios

 

Figure 2: Stable Equilibrium in Macroeconomic perspective

(Source: As created by the author)

The above figure shows the short run adjustments of the demand and the supply curve. However, as the economy progresses, the aggregate demand for goods and services keep on increasing, which in turn results in the increase of the aggregate supply, such that the long run aggregate supply curve in the concerned economy becomes vertical:

 

Figure 3: Derivation of the Long Run Supply Curve

(Source: As created by the author)

Keeping this into consideration, the following section of the assignment tries to analyze the stability of the equilibriums of the countries in consideration.

The economy of China has been showing highly impressive traits in the overall aspects of economic growth and is currently the second largest economy in the world in terms of the growth of its GDP, which can be seen from the following figure:

 

(Source: Tradingeconomics.com, 2017)

Along with the consistently increasing GDP statistics, which can be seen from the above figure, the country has also shown a significant fall in the unemployment scenario in the last few years, which is also an indicator of increasing economic welfare:

 

Figure 5: China’s rate of Unemployment over the years

(Source: Tradingeconomics.com, 2017)

From the above figure, it is evident that after experiencing considerable fluctuations in its rate of unemployment the country, in the last few years has been experiencing a stability in the same.

 

Figure 6: Inflation Rate of China over the years

(Source: Tradingeconomics.com, 2017)

Like that of the unemployment rate, the inflation (which is measured by the Consumer Price Index) of the country, is also observed to attain a stability with less fluctuations in the recent period.

Therefore, from the above figures, it can be asserted that the country, in the last few years, have been reaching to a stable state in terms of the major economic indicators, which in turn, indicates that in the present situation, the economy of China is reaching a state of stable equilibrium (Shambaugh, 2013).

Australia has remained one of the leading economies in the global scenario, over the last few decades, much of which can be attributed to its impressive and stable economic growth patterns. However, in the recent periods, the biggest market economy has been experiencing fluctuations and mixed performances in its economic growth indicators, which are shown as follows:

 

Figure 7: GDP of Australia over the years

Stable Equilibrium in China's Economy

(Source: Tradingeconomics.com, 2017)

As can be seen from the above figure, the GDP of the country, which had been stability increasing till 2013, has started experiencing gradual fall in the recent period. Like that of GDP, the average price levels of the country are also enduring visible fluctuation as shown below:

 

Figure 8: Inflation rate in Australia

(Source: Tradingeconomics.com, 2017)

The rate of inflation with all the fluctuations however, indicates towards a roughly downward trend, with the magnitude of the oscillations slowing down.

 

Figure 9: Change in unemployment rate in Australia

(Source: Tradingeconomics.com, 2017)

Like that of inflation, the unemployment rate of the country has also endured considerable fluctuations in the recent past. The fluctuations however have reduced considerably in the last few years, with the unemployment rate of the country reaching to a stable situation.

The fluctuations in the GDP as well as the other economic indicators in the country can be considerably explained with the help of the business cycle theory. This economic theory suggests that in its course of progress, an economy goes through alternate phases of economic boom and stagnancy, which together shape up the growth trend of the economy and shed light on its potential GDP.

 

Figure 10: Potential GDP and Business Cycle

(Source: As created by the author)

The economy of Australia, as asserted from the above figure, has been experiencing several turmoil including the withering out of the mining boom, the burst of the housing market and the revamped financial crisis, which clubbed together have resulted in the fluctuations in its economic indicators (Sherman, 2014).

The economy of the USA is considered as the largest and most powerful economy in the global framework and the primary reason behind the same is the fact that the country has over the years shown impressive and stable growth trends in its economic indicators as can be seen from the following GDP growth figure:  

 

Figure 11: GDP growth of the USA

(Source: Tradingeconomics.com, 2017)

The overall dynamics in the price level of the country is shown as follows:

 

Figure 12: Rate of inflation in the USA

(Source: Tradingeconomics.com, 2017)

As is evident from the above figure, after considerable fluctuations in the inflation rate, measured in terms of the Consumer Price Index, over 2008-2012, the trend is gradually becoming stable with non-dramatic fluctuations.

 

Figure 13: Rate of Unemployment in the USA

(Source: Tradingeconomics.com, 2017)

Over the last for years, the unemployment rate of the country has been stability falling with no dramatically visible ups or downs, which in turn indicates that the employment generation schemes of the country are gradually and stably reducing down the unemployment burden.

From the above discussion, it can thus be concluded that the economy of the USA, in the recent years, is showing the trends of achieving stable equilibrium situation (Hall & Lieberman, 2012).

References 

Australia GDP | 1960-2017 | Data | Chart | Calendar | Forecast | News. (2017). Tradingeconomics.com. Retrieved 15 January 2018, from https://tradingeconomics.com/australia/gdp

Baumol, W. J., & Blinder, A. S. (2015). Microeconomics: Principles and policy. Cengage Learning.

Hall, R. E., & Lieberman, M. (2012). Microeconomics: Principles and applications. Cengage Learning.

Nicholson, W., & Snyder, C. M. (2014). Intermediate microeconomics and its application. Cengage Learning.

Shambaugh, D. L. (2013). China goes global: The partial power (Vol. 111). Oxford: Oxford University Press.

Sherman, H. J. (2014). The business cycle: growth and crisis under capitalism. Princeton University Press.

Tradingeconomics.com. (2018). Australia Unemployment Rate | 1978-2018 | Data | Chart | Calendar. Tradingeconomics.com. Retrieved 15 January 2018, from https://tradingeconomics.com/australia/unemployment-rate

Tradingeconomics.com. (2018). China GDP | 1960-2017 | Data | Chart | Calendar | Forecast | News. Tradingeconomics.com. Retrieved 15 January 2018, from https://tradingeconomics.com/china/gdp

Tradingeconomics.com. (2018). United States Inflation Rate | 1914-2017 | Data | Chart | Calendar. Tradingeconomics.com. Retrieved 15 January 2018, from https://tradingeconomics.com/united-states/inflation-cpi

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