Impact of Drought on Macroeconomic Equilibrium in Australia

Running head: ECONOMICS
Economics
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1ECONOMICS
Introduction
Drought refers to a natural disaster occurs when economy experiences lower than
average rainfall in a region. Drought has an adverse effect on people’s life, business and on
government expenditure. The impact of drought might local affecting only those in the
drought-stricken regions or there might be economy wide effect of drought covering areas
outside the drought-stricken area (Freire-González, Decker & Hall, 2017). The effect of
drought is not limited to agricultural sector only. Sectors like energy production, recreation or
tourism sectors are also vulnerable to the natural disaster. The essay summarizes the likely
impact of drought in macroeconomic equilibrium of Australia along with the effect of
government policy intervention.
Analysis
Concept of macroeconomic equilibrium
Macroeconomic equilibrium refers to a stable state of the economy that is attained
where aggregate demand equals the aggregate supply. Aggregate supply signifies total
amount of available goods and services in the economy. This represents aggregate amount of
goods and services that all firms in the industry are willing to sell at a given price level
(Goodwin et al., 2015). Aggregate demand on the other hand captures total demand for the
final goods and services in the economy at a given price level.

2ECONOMICS
Figure 1: AD-AS model macroeconomic equilibrium
The AS-AD model shows macroeconomic equilibrium corresponding to the point
where aggregate supply interests the aggregate demand curve. The Gross Domestic Product
and price level in the economy are determined corresponding to the equilibrium point. In the
above figure, the downward sloping curve AD represents aggregate demand and the upward
sloping curve AS represents aggregate supply (Agenor & Montiel, 2015). E, the equilibrium
point obtained from intersection of aggregate demand and aggregate supply determines real
GDP as Y* and price level as P*.
Impact of drought on macroeconomic equilibrium on Australia
The macroeconomic model of aggregate supply and aggregate demand suggests that
change in either aggregate demand or aggregate supply causes a change in the equilibrium
position. This alters the real GDP and price level. Sudden shocks to aggregate demand and
aggregate supply shift aggregate demand or aggregate supply curve. The economy attains
new equilibrium as per changes in aggregate demand or aggregate supply. Drought is an
example of adverse supply shocks (Uribe & Schmitt-Grohe, 2017). The outbreak of drought
adversely affect aggregate supply by destroying crops. Dry condition and insufficient
precipitation because of drought can kill or damage crops. The adverse effect on aggregate