Economic Impact of Coronavirus Outbreak.

Running head: ECONOMIC IMPACT OF CORONAVIRUS OUTBREAK
Impact of Coronavirus Outbreak on Australian Economy
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ECONOMIC IMPACT OF CORONAVIRUS OUTBREAK
1
(1)Briefly explain the impact of Coronavirus on the following
components of GDP (C, I, X, and M). What’s the likely overall impact
on GDP?
The components of GDP, C, I, X and M represent consumption (C),
investment (I), Exports (X) and Imports (M) respectively. The outbreak of
coronavirus has resulted in a standstill in the largest economies of the world,
affecting the opportunities of international trade and income generation and
expenditure. China, the second biggest economy of the world, and largest
trade partner of Australia, was the first victim to coronavirus crisis and
almost the entire nation went for a lockdown to prevent further damages.
International flights and shipping of products were stopped for preventing
further spread of the virus. This affected the global supply chains negatively
and the exports (X) and imports (M) of China along with all its trade partners
reduced drastically (Ruiz Estrada et al. 2020).
Due to the mass lockdown in the nations, the level of aggregate demand
has reduced significantly, followed by less consumption (C) and less spending
in the economies. Due to this demand side issue, the production level has
declined massively. Along with that, the level of investment (I) has been
going down too. There are rate cuts by RBA and the US Federal Reserve and
consumers are increasing their precautionary savings by cutting back on
their spending. As the total output level is decreasing with little scope of
business growth and higher return, the volume of investment is also
declining significantly pushing the economy towards a phase of long
recession (Shi and Fang 2020).
The COVID-19 pandemic has brought a hard blow to the overall GDP of
Australia and other nations. Not only the domestic demand and consumption
has gone down, but international exports and imports have stopped also due
to extensive lockdowns taking place everywhere. This is lowering the GDP
level and GDP growth rate of the economies. Also, it is not limited to the
countries where the pandemic has hit hard, but other economies as well
where the virus spreading level has been low.
(2) The author writes that inflation in Australia has been below the
target band of 2-3%. Why is low inflation a bad sign for the Australian
economy?
According to Holden (2020), the economic growth in Australia was sluggish on
a per capita basis where unemployment rate was 5.3% and wage growth was
around 2%. Low inflation indicates low growth of the economy resulting from
lower level of aggregate demand. Inflation refers to overall rise in the price
level in the economy in a certain time period. It occurs either due to excess
demand in the market or due to high cost of production, whose burden the
producers shift on to customers by raising the product prices (Papava and
Charaia 2019). Therefore, long running low inflation implies less demand and
less consumption spending in the economy by the consumers. This affect the
production growth, that is, GDP growth. Low inflation for a long time in the
Australian economy implies that the economy has been operating well below
its full potential, resulting in wastes of resources (Cornish 2019). This
phenomena of low inflation affects all the sectors in the economy as the level