Impact Of Drought On Macroeconomic Equilibrium In Australia

The assignment consists of one problem essay question. Before attempting this assignment you are expected to have read Text chapters 12, 13 and 14. You are encouraged to make use of additional sources. Sources used in your answer should be fully referenced in APA 6th style.

Answer the following question ensuring that you apply economic principles or theory related to understanding the health of the economy and the need for government intervention to inform your analysis and support your decisions. Communicate your ideas with correct grammar, spelling and writing style and support your answer with diagrams and examples as necessary.

Using appropriate diagrams, explain the likely impact of drought on macroeconomic equilibrium in Australia. Use evidence drawn from media reports to illustrate you answer. How might government policy response to the drought modify the macroeconomic impact of the drought?

This assessment task will assess the following learning outcome/s:

• be able to critically examine and demonstrate why it might be necessary for government to intervene in the production of goods and services and in the distribution of income
• be able to examine critically the health of the economy as a whole through the analysis of major economic variables and advise on likely policy alternatives.

Macroeconomic Equilibrium and Variables

 Macroeconomic equilibrium in the economy is that state where the supply of the economy equal the demand of the of tee economy.   The changes in the variable of macro economy will be having an impact on the rate of unemployment, price and also on the rate of inflation.  The variables of macro economy is known to affect a large population and is also related to the economy at the national level.  The variables of the macro economy comprises of the inflation, savings, output of the economy along with unemployment. The factors of the macroeconomic equilibrium are known to be the indicators of the performance of the economy that are known to be monitored by either the government or the consumers. When the precipitation happens which are below the average level, at that time drought takes place. Drought takes place when there is a prolonged shortage of water supply. The droughts usually takes place as a result of deficiency of rain, climatic changes, erosion from various human activities and dry season of El Nino.

Effect on the macroeconomic equilibrium as a result of drought.

According to the Australian Bureau of Methodology, drought takes place in Australia when the precipitation will be in the lowest docile for over three months when compared to the previous year.  Between the year 2003 and 2012, one of the worst drought takes place.  Here are presence of many regions in Australia, where the low amount of rainfall led to drought.  It has been found out that since the year 1994, the global warming and the changes in climate are some of the reasons of the drought in Australia. The decrease in the amount of rainfall started taking place from the year 2013 in Australia, that lead to a huge period of drought in some of the paces in Queensland.  In some cases drought in the region of New South Wales lead to huge amount of crop failure in the year 1838.  At the time of Federation, it have been found out that Australia had suffered a huge amount of drought.

Drought in most of the cases shifts the supply curve to the left which leads to the negative supply shock in the economy.  The supply shock in the economy generally takes place when there is sudden decrease or increase in the services or goods in the  economy.  The sudden change in the supply curve is known to impact the equilibrium price of the goods and services in the economy. During the short run, the supply curve will be shifting to left which leads to decline in the quantity for output produced and also will be increasing the level of price in the economy. A huge rate of unemployment takes place in the economy as a result of drought. The unemployment was severe in the case of the agricultural sector. A huge amount of people have known to become jobless mostly in case of agricultural sector. The unemployment in case of the agricultural sector have known to affect the jobs in case of manufacturing sectors.  Most of the people have known to lose their jobs in the sectors of food processing industry.  The production of agriculture have declined with the decrease in the amount of mixed farming and growing crops.  This above situation takes place when here is a negative supply shock as a result of drought in the economy. When the supply curve are known to shift left in the economy, the supply of jobs declined as a result of drought. Demand of jobs rose sharply compared to the supply of the jobs. For this reason, it can be said that as a result of drought, employment will be declining in the economy. Drought have also known to take place because of the crop failure.  When the failure of crops takes place it can lead to inflation, hot summer weathers along with dry summers leading to crop shortfalls in case of Australia.  As a result of the adverse conditions of weather, the production of crops had been extremely in nature.  The decline in the crop production leads to inflation in the economy. Inflation takes place in the economy when there is an increase in the price of goods and services in the economy over a long period of time.  Inflation is a kind of quantitative measure at which the price of basket of goods in the economy will be increasing over the period of time.  Inflation resulted to the rise in the price of commodities mostly in case of agricultural commodities.  The continent of Australia have known to suffer from extreme climatic conditions.  Heatwaves, fires, drought and flood takes place quite frequently. Blistering heat along with droughts are a common phenomenon in case of drought. The Millennium drought in case of Australia known to be devastating in nature which took place in both south-western and south eastern Australia.  

Impact of Drought on Macroeconomic Equilibrium

The millennium droughts takes place as a result of poor rainfall in the cool season.  Federation drought have known to affect the Australian continent which took place as a result of scanty rainfall in the warm season. New South Wales in Australia, have been entirely in drought. The dry winter in case of Australia I rennet decade had been termed as one of the worst drought that took place as a result of drought. The autumn of Australia had also been quite dry for few months.  One of the reason of drought which took place in new south wales was that the amount of rainfall had been less than 10 mm. the millennium drought which took place between 1997to 2005 was known to be one of the devastating drought in Australia. This type of drought is known to severely affect the ecosystems of the agriculture and river of states like Victoria and the Murray – Darling Basin, which is also the largest river system of Australia. In the global scale, the drought in Australia took place as the reversal in the intensification of the water cycle.  The effect of drought ad been stated as the meteorological, agricultural, hydrological as well as socioeconomic in nature which are the contributors of the climatic change and water management will be affecting the future.

Drought also has a huge impact of economy in case of Australia. The gross domestic product of the farm in Australia as a result of drought declined by 24 percent in the year 2003where the rural exports known to have declined a lot. It has known to decline the employment rate by one lakh people.  For the decline in the supply of goods, the prices of goods have also increased sharply. The livestock prices have known to increase the price of the goods especially in case of quality breeding stock.  Australian horticultural production are known to get hugely affected by the drought. The recovery from the Australian drought took place in the year 2003 and 2004 which also lead to improvement in the production of grain. The Australian drought have known to subtract one percent from the gross domestic product between the years 2003 and 2004. It has known to reflect the overall improvement in the production of food grains.  The Australian drought after the year 2003, the gross domestic product are known to increase more than 20 percent. The Australian drought more specifically affected the agricultural production. Drought is known to have affect the fortunes of the farming business and on rural communities where they operate. The Australian climate is not stable in nature and are quite prone to the drought.  Droughts have known to impact on the fortunes of the farming business and on rural commodities where they likely to operate. The Australia climate is such that they are variables in nature and are mostly prone to drought.  The droughts re also known to affect the agricultural yields of Australia.  It have also contributed to the growth to the rise in the prices of food. The recent drought will be raising the price of commodities and services.

Effects on Employment

The rise in prices have known to increase the consumer price index twice.  The prices of fruits as well as the vegetables are known to be devastated hit since the price have increased a lot. In 2007, the ANZ bank stated drought as the main objective for the increase in the prices of food. The impact of the climatic change can be stated as one of the factor which are known to be associated with many factors that will be raising the food prices higher.  When there is climatic change, the food prices will be going upwards. The severity of the droughts will be increasing as a result of change in climate. Droughts have increased to forty percent in the recent decade. The drought conditions are known to be worse when there will be high emission and therefore it is known to have the negative impact on the Australian ecosystem.

The government will be planning for the mitigation of drought by providing subsidies for seeds and more amount of diesel to the farmers.  The government also known to have reliefs from the loans and interest. He can also help the farmers with various plans of irrigation where there will be scanty rainfall. The government will be changing the amount of tax. He will be also be fighting for unemployment with the help of monetary and fiscal policies. The changes in tax by the government will be helping to achieve full employment. The government will also change the tax rate and spending for changing the jobs and unemployment in the economy. When the government will be changing its spending. It will be helping for the achievement of full employment and price stability in the economy. The government will be changing the price level and employment through the fiscal policies. The fiscal policies will be affecting the demand where there be changes in the government spending along with taxation. The spending of the government along with the changes in the taxation will be influencing the level of employment and the household income which is known to be the consumer spending and investment. The Reserve Bank of Australia will be targeting the full employment where the growth of the wage will be matching the productivity levels.  The inflation takes place when there is growth in the economy as a result of increased spending.

Figure 1 Supply shock as a result of drought

The government will be declining the inflation rate for reduction in the money supply or with the help of contractionary policy. The goal of the contractionary policy is reduction of the money supply. The prices of the bond have declined and will rise in the interest rate. The government will control inflation. The government will also increase the ceiling of the subsidy in seeds. For this reason, the government will raising the ceiling of the seed subsidy and will be saving the horticultural crops. He can also implement various kinds of fodder development program by priding loans to the farmers as a result of drought.

Conclusion

Droughts in general have a huge impact on the macroeconomic equilibrium where in most cases it result to supply shock which will lead to inflation, hot summer and excessive dry weather which lead to huge shortfall of crops in Australia. As a result of adverse weather conditions the production of crops had been hugely affected and therefore lead to inflation in the economy.

Reference list

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