Impact of Drought on Australian Economy and Government Intervention

Running head: ECONOMICS
Economics
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1ECONOMICS
Introduction
Lack of rainfall is one of the biggest threat for the agricultural sector. The phenomenon of
below average rainfall for a considerably long period is called drought. This a natural disaster
having a negative effect on people, business and the society. The intensity of impact of drought
depends on severity of drought. Based on the severity of drought the effect might be either local
or economy wide (Kiem & Austin, 2013) Objective of this essay is to evaluate impact of drought
on Australian economy. Additionally, the paper also examines the likely impact on government
policy intervention on economic outcome during drought.
Analysis
Aggregate demand and aggregate supply model
The two forces determining macroeconomic equilibrium an economy are aggregate
demand and aggregate supply. Aggregate demand is the sum of demand of all the produced final
product and services in the economy. It is represented as a sum of expenditure on consumption,
investment, government spending and net export. Aggregate supply represents the availability of
total product and services in an economy (Heijdra, 2017). The economy attains a stable
equilibrium where the aggregate demand is same as aggregate supply. The macroeconomic
equilibrium determines real GDP and price level of the economy. The aggregate demand and
aggregate supply model of macroeconomic equilibrium is described in the following figure.

2ECONOMICS
Figure 1: Macroeconomic equilibrium
Figure 1 portraits macroeconomic equilibrium with the aid of aggregate demand and
aggregate supply. AD1 shows the aggregate demand curve and SRAS shows the short run
aggregate supply curve. LRAS is the long run aggregate supply curve (Mankiw, 2014) The
interaction of aggregate demand and aggregate supply attains equilibrium corresponding to the
point E. At the equilibrium point, price level is P* and GDP is Y*.
Drought and impact on Australian equilibrium
An economy is in equilibrium unless some external forces changes either aggregate
demand or aggregate supply. Sudden shocks causes demand or supply to change shifting the
economic equilibrium. Natural calamities like drought destroy economic resources and hamper
production. The sector most vulnerable to drought is the agricultural sector. A certain amount of
rainfall is required to complete a crop cycle. Lack of sufficient amount of water damages crops