Economic Stability of Australia

This assignment analyzes the economic stability of Australia using both microeconomic and macroeconomic perspectives. It examines key indicators like GDP and price levels to assess internal economic stability. Additionally, it explores the balance of payment account to evaluate external economic stability. The analysis highlights Australia's current state of economic stability with a focus on recent trends and data.

Running head: ECONOMICS FOR BUSINESS
Economics for Business
Name of the Student
Name of the University
Author note

1ECONOMICS FOR BUSINESS
Table of Contents
Introduction................................................................................................................................2
What is meant by stable equilibrium..........................................................................................2
Government intervention...........................................................................................................3
Stability Analysis for Australian Economy................................................................................4
Price level...................................................................................................................................5
External Stability for Australian Economy................................................................................6
Conclusion..................................................................................................................................7
Reference....................................................................................................................................8

2ECONOMICS FOR BUSINESS
Introduction
Free market is a market condition where demand and supply forces works
independently to bring equilibrium for the market. The equilibrium once obtained maintains a
stable state without presence of any external forces. The term ‘stable equilibrium’ refers to a
state of rest where any fluctuation from this position automatically back to its original
position. The economy of a nation is said to be stable if stability is maintained in different
macroeconomic indicators such as GDP, price level, employment state and even for the
external sector of the economy. In this paper, current state of Australian economy is analyzed
to examine the stability of the economy.
What is meant by stable equilibrium
Equilibrium is a position where all the active forces are at rest. The forces work in
free market is the force of demand and supply. Demand curve represent the preference and
buying decision of the buyers whereas supply curve corresponds to the decision of sellers.
Equilibrium price is that price where willingness to pay of buyers matches with the price cat
which sellers willing to sell the goods (Garda & Ziemann, 2014). Corresponding to this price
equilibrium quantity is determined which is the quantity supplied in the market based on the
demand of buyers. Any upward or downward movement of the equilibrium price means
mismatch between supply and demand creating either excess supply or excess demand
situation. Market cannot sustain with excess supply or excess demand. To maintain balance
between supply and demand prices is used as an adjustment tool.

3ECONOMICS FOR BUSINESS
Figure 1: Demand, supply and economic stability
(Source: As created by Author)
In the figure above, P* and Q* imply the equilibrium price and quantity respectively
obtained where demand curve cuts the supply curve. Now suppose price is somewhere above
the equilibrium price. This will create an excess supply situation as at the higher price, buyers
demand less and seller supplies more. To sell the excess supplied quantity price has to be
reduced otherwise the excess quantity is wasted leading to wastage of resources and hence
making market inefficient. Conversely, if price is down the line of equilibrium price then
there will be excess demand because at low price seller supplies less where buyers demand
more (Fisher, 2016). To meet the excess demand price has to be increased to encourage
supplier to supply more and reduces some demand. This explains how price works as an
invisible hand to restore stability in equilibrium.
Government intervention
The price and quantity determined in the free market may seem too high or too high in
special circumstances. Then government need to intervene and sets an optimum price either

4ECONOMICS FOR BUSINESS
above or below the equilibrium price. Government often put a ceiling on price if it considers
equilibrium price is too high. The minimum price set by the government above the
equilibrium price is called a price floor (Lewin et al., 2016). In the presence of externality
either a greater or a lower quantity is supplied. In this situation also government intervenes to
correct external distortion and ensure optimum quantity for the society.
Stability Analysis for Australian Economy
When it comes to a country’s economy then analysis of a single market is not
sufficient. The stability of the entire economy depends on macroeconomic stability. It is the
aggregate demand and aggregate supply that is considered here. Aggregate demand is the
demand for entire economy and aggregate supply is the total supply quantity available
(Robinson, Nguyen & Wang, 2017). The intersection of aggregate demand and arrogate
supply determines GDP or income and price level of the economy.
GDP
Gross Domestic Product is the monetary value of all goods and services produced in
the economy. When GDP is stable then this means there is no major fluctuation in economic
activity. For this, current GDP values of Australia are considered.

5ECONOMICS FOR BUSINESS
Figure 3: Real GDP in Australia
(Source: tradingeconomics.com)
Real GDP is the measure of actual measure of national output, computed at a fixed
base year prices. The figure shows there is no notable fluctuation in recent GDP trend
(Sutherland and Hoeller, 2014). GDP grows gradually indicating towards a stale economy.
Price level
Movement of price level is an important determinant of economic stability. Price level
is desired to be in stable state for overall stability of the economy. Any gradual upward
movement of the existing price level is known as the inflation rate. A stable inflation rate
implies a stable price level. However a low to moderate level of inflation is needed for
boosting up the economy.

6ECONOMICS FOR BUSINESS
Figure 4: Recent inflation trend in Australia
(Source: tradingeconomics.com)
Recent statistics shows price level in Australia is moving upward at a slower pace.
Highest inflation rate is 2.1, recorded in the month of March 2017 (rba.gov.au 2017). After
that price level started falling. This shows currently price level in Australia is at a stable state.
External Stability for Australian Economy
Australia engages in international transaction with several countries in the world.
External relation of Australia is defined not only in terms of but it also explains investment
made abroad. Because of significant influence of external economies on Australian internal
economies the government gives priority on maintaining external stability. External stability
is indicated from the balance of payment account. Balance of payment account keeps record
of all international transaction. Balance of the external economy in Australia has improved
with an export boos resulted from economic boom (smh.com.au, 2017). This ensures stability
of external account.

7ECONOMICS FOR BUSINESS
Conclusion
The report explains stability using both microeconomics and macroeconomics
perspective. Microeconomic stability concerns with stability in only one market whereas
macroeconomic stability is defined in terms of aggregate demand and aggregate supply. In
this context current state of Australian economy is analyzed. Two major indicators, GDP and
price level are focused. Neither GDP nor price level constitute any notable fluctuation,
thereby indicating a stable state for Australia’s internal economies. The external economy of
Australia is also important for stability analysis. Improvement in balance of payment owing
to trade surplus helps in bringing external stability.

8ECONOMICS FOR BUSINESS
Reference
Australia GDP | 1960-2017 | Data | Chart | Calendar | Forecast | News.
(2017). Tradingeconomics.com. Retrieved 13 September 2017, from
https://tradingeconomics.com/australia/gdp
Fisher, F.M., 2016. Adjustment processes and stability. The new palgrave dictionary of
economics, pp.1-6.
Garda, P., & Ziemann, V. (2014). Economic Policies and Microeconomic Stability.
Lewin, P., Lewin, P., Cachanosky, N. and Cachanosky, N., 2016. A financial framework for
understanding macroeconomic cycles: The structure of production is relevant. Journal
of Financial Economic Policy, 8(2), pp.268-280.
Measures of Consumer Price Inflation | RBA. (2017). Reserve Bank of Australia. Retrieved
19 September 2017, from http://www.rba.gov.au/inflation/measures-cpi.html
Robin, M. (2017). Record trade surplus is good news for our AAA rating. The Sydney
Morning Herald. Retrieved 19 September 2017, from
http://www.smh.com.au/business/the-economy/australia-celebrates-record-trade-
surplus-as-exports-boom-20170202-gu3t09.html
Robinson, T., Nguyen, V. H., & Wang, J. (2017). The Australian Economy in 2016–17:
Looking Beyond the Apartment Construction Boom. Australian Economic
Review, 50(1), 5-20.
Sutherland, D. and Hoeller, P., 2014. Growth policies and macroeconomic stability. OECD
Economic Policy Papers, (8), p.3.