Impact of Drought on Macroeconomic Environment of Australia

Running head: ECONOMICS
Economics
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1ECONOMICS
Introduction
It is difficult to properly define drought as no universal definition is available for the
particular natural calamity. Definition of drought depends on climatic condition of specific
region. In general, drought occurs when a country experiences prolonged period of extremely dry
condition. The severity and extent of drought is examined in terms of deficiency in rainfall and
associated impact on water level, agricultural sector and natural environment. The essay traces
effect of drought on macroeconomic environment of Australia. Drought is seen as an integral
part of Australian economy and attacks the economy more than that flood or fire does (Banerjee
et al., 2013). Some droughts are short lived having a relatively small impact. The intense drought
extended for a loner period has a prolonged consequence on the economy and environment.
Government policy intervention occurs to safeguard the economy from damage caused by
drought. The essay also discusses nature of policy intervention and its likely consequence to alter
drought outcome.
Analysis
Impact of drought
The impact of drought on macroeconomic equilibrium of Australia depends on likely
influence of drought on aggregate demand or aggregate supply of the economy. Macroeconomic
equilibrium of an economy is explained with the help of aggregate demand and aggregate
supply. Aggregate demand shows the sum of demand of all household, business, the government
and net export. The aggregate demand curve explains the relationship between real GDP
demanded and price level. Aggregate supply of an economy is defined as sum of quantity that
different firms in the economy are willing to supply at different prices (Heijdra, 2017) Aggregate

2ECONOMICS
supply curve captures the relationship between total quantity supplied and price. The aggregate
demand curve slopes downward both in the short run and in the long run. Shape of aggregate
supply curve in the long run however is different from that in the short run. Aggregate supply
curve slopes upward in the short run. The long run aggregate supply is fixed at the potential real
GDP and is shown by a vertical line.
Figure 1: Macroeconomic equilibrium of Australia
(as created by Author)
The long run macroeconomic equilibrium cooresponds to the point E. The stable long run
equilibrium is achived where short run and long run aggregate supply match with the aggregate
demand in the economy (Mankiw, 2014). Change in condition of aggregate demand or aggregate
supply results from external shocks changes the position of macroeconomic equilibrium and
changes real GDP and price level from the stable position.