Australia's Economic Stability

The assignment explores the concept of equilibrium and stability within the context of the Australian economy. It examines various economic indicators and attributes the country's relative stability to robust stabilizing policy mechanisms. The analysis draws upon historical data, including Australia's experience during the Great Recession of 2007-2008, to illustrate the effectiveness of these policies.

Running head: ECONOMICS ASSIGNMENT
Economics Assignment
Name of the Student
Name of the University
Author Note

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Introduction:
The term equilibrium, in economic context, is defined to be the condition where the
demand and the supply forces interact with each other and reach to a mutually agreed balanced
situation, from where neither the demand forces nor the supply forces have any incentive to
deviate from, provided there is no external influence from any exogenous conditions. The
demand and the supply forces are the backbone of the market dynamics and all the activities in
the market are subjected to the mutual interactions of these two forces (Ekelund Jr & Hébert,
2013). The equilibrium, as defined above, is said to be a stable equilibrium, if in case of any
deviation from the equilibrium condition due to influence of exogenous forces, the economy
again comes back to its original equilibrium situation in due course of time. The report takes into
account this concept of stability of equilibrium, both in terms of microeconomic and
macroeconomic perspectives. In this context, the report tries to analyze the current stability
scenario in the economy of Australia, with respect to economic indicators like GDP, price levels
and others (Baumol & Blinder, 2015).
Stability of equilibrium:
In the market economy, the consumer and the producer behaviors are determined by the
demand and the supply side dynamics respectively. The dynamics in the market can be shown as
follows:

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Figure 1: Microeconomic Stability in equilibrium
(Source: As created by the author)
The above figure shows the dynamics of the demand and the supply curve. As can be
seen from the diagram, the equilibrium occurs at the point where the supply curve and the supply
curve touches each other; point E in this case. The equilibrium price is at point P0 and the
equilibrium quantity demanded and the equilibrium quantity supplied both being Q0. The
stability of the equilibrium, can be seen with the help of the following phenomenon (Fisher,
2016).
In the above diagram, when due to some reasons, the price increases from the equilibrium
price P0 to P1, then the demand for the commodity decreases significantly. This fall in demand
may be a cumulative effect of two events. Due to an increase in the level of price, firstly, the

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existing buyers of the same commodity buy less than the previous amount. Secondly, the
marginal buyers, in the initial condition, now completely moves out of the market as the
commodity now becomes unaffordable to them (Boland, 2014). Together these two effects
decrease the overall demand in the market. However, due to an increase in the price, the market
becomes more attractive to the sellers, more and more sellers try to enter the market, and the
existing sellers increase their production, thereby increasing the supply in the market. Together
this leads to an excess supply in the economy, which in its turn creates a downward pressure on
the price levels as the sellers are required to lower their price levels. Thus, the price level comes
back to its initial equilibrium point P0 (MacDonald & Stein, 2012).
Again, if the reverse scenario takes place and the price decrease from the equilibrium
level P0 to P2, then the supply decreases, as due to loss of profitability in the market, many
sellers move out of the market. On the other hand, the decrease in the price increases the demand
for the same commodity, by the law of demand. This in turn creates an excess demand in the
market, leading to an upward pressure on the price levels such that the price again comes back to
its equilibrium level P0.
Thus, it can be seen that no matter however the price level changes from the equilibrium
situation, the demand and the supply forces interact with each other to bring it back to its initial
equilibrium situation, thereby indicating that the concerned equilibrium is a stable one
(Henderson, 2014).
The above scenario is based on the microeconomic perspective as it deals with the
dynamic stability of the equilibrium in one particular market. The same concept, however, is
applicable in the macroeconomic perspective too:

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Figure 2: Macroeconomic stability in equilibrium
(Source: As created by the author)
In the macroeconomic perspective, the equilibrium is determined on the basis of the
aggregate demand and the aggregate supply in the economy as a whole and in case of any
deviations from the equilibrium situation, these two forces mutually interact with each other to
bring the economy back to its original equilibrium situation (Rader, 2014).
Stability Scenario in the economy of Australia:
The Australian economy has been one of the significantly dominating players in the
global economic scenario and is considered to be one of the most successful ones too. The

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economy type of this country is mainly market based and capitalistic in nature. The government
and the centralized planning does not play much role in economic decisions and activities in this
market economy and the government mainly plays the role of a supervisor and not that of a
controller. Much of the market decisions are dependent on the activities of the demand side and
the supply side players in the economy. The objective of this economy is to maximize the profit
of the providers and also to increase the satisfaction of the consumers, thereby increasing the
overall welfare of the society as a whole.
The economic stability of any country can be portrayed by the GDP and the GDP
dynamics of the country. The Gross Domestic Product of a country is the value of the sum of all
the goods and services that are produced within the geographical boundary of the country within
a particular period, generally one economic year. The growth rate of GDP and the growth pattern
tells a lot about the welfare and the economic stability of the country.
Figure 3: Australia GDP over the years (2006-2016)
(Source: Tradingeconomics.com, 2017)

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The above diagram shows that the growth in the Gross Domestic Product of the economy
of Australia, has been stable in the last few years. As the trend shows, there exists a non-dramatic
upward pattern in the growth rate of the economy. The GDP of the country has increased from
USD 853.76 billion in 2006 to USD 1567.18 billion by 2013. However, the growth reduced a
little and came down to 1204.62 USD billion by the end of the year 2016. However, both the
increase and decrease do not show any dramatic fluctuations (Dyster & Meredith, 2012).
Figure 4: Rate of Inflation in Australian Economy
(Source: Tradingeconomics.com, 2017)
The overall level of price and the fluctuations in the inflation rate in the country has also
been more or less stable, with the fluctuations being moderate and the economy maintaining a

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more or less stable situation in this aspect. This implies that the overall economy is in a steady
state equilibrium, where even if some irregularities occur, they are not of drastic nature and are
taken care of eventually. This in turn implies that the overall standard of living and the consumer
price index of the country maintains a more or less stable pattern.
Stabilizing framework in the economy:
The economy of Australia has an inherent stability mechanism, which consists of primarily two
types of stabilizers:
a) Structural or Discretionary Stabilizer:
These type of stabilizers are used in case of economic fluctuations of bigger magnitudes like
recessions or depression. These include changes in the budget of the government as a whole, by
changing the existing taxes, modifying them and introducing new budgetary mechanisms
(Manalo, Perera & Rees, 2014).
b) Automatic Stabilizer:
This kind of stabilizing instruments operates in a counter cyclical mechanism, which does not
directly change the budgetary structures but indirectly affects the budget and the aggregate
demand of the economy. These instruments include GST and CGT and the company taxes. These
measures are in general used by the governing authority of the country in case of small and
manageable fluctuations.

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The effectiveness of this policy framework can be seen from the country’s past
experience in dealing with the Great Recession of 2007-2008. This phenomenon, which
originated in the USA and affected more or less all the economies of the world, comparatively
left the economy of Australia relatively unaffected. The inherent stabilizing system of the
economy helped immensely in getting out of this huge global adverse economic phenomenon
without increasing the burden of suffering of the residents by that amount (Bagliano & Morana,
2012). The stabilizing framework included the robust banking sector of the economy, which
worked efficiently in keeping the interest rates and the lending potentials floating. Other factors
contributing in ensuring stability includes the strong and beneficial trade relations of the country
with the other economic giants like China and Japan, other than the USA, which again indicates
that the country has also gained stability in the external sector.
Conclusion:
The above discussion elaborates the concept of equilibrium and stability in the equilibrium. In
this context, it can be seen from the above discussion that the economy of Australia has
maintained a more or less stable pattern with respect to the different economic indicators. Much
of this stability can be attributed to the robust stabilizing policy mechanisms which the country
enjoys and which has proved to be efficient till now in bringing back the economy to stability in
case of any fluctuations.

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References
Australia GDP | 1960-2017 | Data | Chart | Calendar | Forecast | News.
(2017). Tradingeconomics.com. Retrieved 22 September 2017, from
https://tradingeconomics.com/australia/gdp
Bagliano, F. C., & Morana, C. (2012). The Great Recession: US dynamics and spillovers to the
world economy. Journal of Banking & Finance, 36(1), 1-13.
Baumol, W. J., & Blinder, A. S. (2015). Microeconomics: Principles and policy. Cengage
Learning.
Boland, L. A. (2014). Methodology for a New Microeconomics (Routledge Revivals): The
Critical Foundations. Routledge.
Dyster, B., & Meredith, D. (2012). Australia in the global economy: Continuity and change.
Cambridge University Press.
Ekelund Jr, R. B., & Hébert, R. F. (2013). A history of economic theory and method. Waveland
Press.
Fisher, F. M. (2016). Adjustment processes and stability. The new palgrave dictionary of
economics, 1-6.
Henderson, J. V. (2014). Economic theory and the cities. Academic Press.

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MacDonald, R., & Stein, J. L. (Eds.). (2012). Equilibrium exchange rates (Vol. 69). Springer
Science & Business Media.
Manalo, J., Perera, D., & Rees, D. (2014). Abstract for RDP2014-11: Exchange Rate Movements
and the Australian Economy.
Rader, T. (2014). Theory of microeconomics. Academic Press.
Tradingeconomics.com. (2017). Australia Inflation Rate | 1951-2017 | Data | Chart | Calendar |
Forecast. Tradingeconomics.com. Retrieved 21 September 2017, from
https://tradingeconomics.com/australia/inflation-cpi