Evaluating the Macroeconomic Impact of Drought in Australia

This essay explores the multifaceted impact of drought on the Australian macroeconomy, detailing its effects on various sectors including agriculture, manufacturing, and energy. It discusses how drought leads to reduced vegetable supply, increased prices, and decreased output, prompting government intervention through imports and support packages. The analysis extends to the energy market, where hydro energy reliance makes the economy vulnerable to energy crunches and increased operational costs. Furthermore, the essay highlights the potential for decreased tax revenue and reduced consumer spending, leading to a combination of high inflation and low aggregate demand. The impact on Australia's export market, particularly the beef industry, is also examined, noting potential losses in market share and widening current account deficits. The essay concludes by evaluating the government's policy responses, including increased expenditure and interest rate reductions, suggesting strategies to boost aggregate demand and stabilize the economy. Desklib provides access to this and other solved assignments for students.

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ECONOMICS ASSIGNMENT

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Contents
The impact of drought in the macroeconomy of Australia........................................................3
Government’s policy..................................................................................................................4
Reference....................................................................................................................................6

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The impact of drought in the macroeconomy of Australia
Different factors and the events in the macroeconomic structure influence the macroeconomic
equilibrium. Likewise, the drought is also an event that influences the equilibrium of the
Australian economy. The drought situation in Australia influences other sectors of the
economy that further impacts the aggregate demand and hence the economic performance
gets disturbed. One of the direct impacts of the drought in Australia has been a reduction in
the supply of vegetables in the market. The price level increased and hence the overall output
reduced significantly thereby harming other sectors of the economy as well.
One of the direct impacts of drought is through the farmers of the economy. The irrigation
cost increases and hence at each price level the farmer produces fewer amounts of vegetables.
The price in the food market and the other related market increases along with the reduction
in the overall output. Fowler, Peel, Western & Zhang (2016) stated that the government in
these cases start importing from the foreign economies. The government of Australia has also
proposed to source necessary food materials from the foreign markets in order to keep the
prices and the output in the economy stable. This policy of the government will further
impact the current account balance and the trade balance of the country as well. The impact
of drought has also started influencing other related sectors of the economy as well. For
example, the manufacturing companies associated with agricultural equipment have
experienced a reduction in demand. The demands for fertilisers have reduced by 41%
compared to the value of the last quarter (Cbsnews.com, 2019).
The drought can also increase the expenditure of the government as well. The Australian
government may look to intervene with packages to support the farmers and hence the
expenditure of the government can increase. In addition to that, drought and rough weather
can also give rise to wildfires which is very common in the case of Australia (Kiem et al.
2016). Therefore, the drought can increase the expenditure of the government. Now, the
impact of this is not limited to an increase in expenditure as other variables are also related to
each other. Government expenditure is a major part of aggregate demand and hence increase
in the aggregate demand can increase in the price level in the near future as well. Therefore,
drought in Australia can increase the level of inflation in the economy as well.

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Figure 1: The shift in the aggregate demand curve and increase in price level
(Source: Allen et al. 2015)
Another major impact of the drought is on the energy market of the economy. Hydro energy
contributes to 46% of all the supplies of energy in the market of Australia. Therefore drought
can make these units stop working. This can lead to a severe energy crunch in the economy of
Australia. Therefore, most of the companies can stop their operation due to nonavailability of
the energies in the economy (King, Karoly & Henley, 2017). The cost of energy can also
compel the companies to increase their prices of the product that can further increase the
price level in the economy. Adding to the effects due to the increase in government spending,
this can have a major impact on the inflation level of the economy. Furthermore, the
government also experiences a reduction in tax revenue as well due to the drought. As the
effects of drought increase the price level in the economy, customers of the market reduce
their spending and tax revenue reduces. Saft et al. (2015) noted that reduced consumer
spending from the side of the customers can reduce the aggregate demand for goods and

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services in the market. Thus, a situation of high inflation and low aggregate demand would
arise in the economy of Australia due to the drought.
In addition to that, the export market activities of Australia would also be hampered due to
the drought in the economy of Australia. Australia exports a sizeable amount of beef in
foreign economies such as China and other East Asian economies. The drought is expected to
increase the price of beef in the domestic market of Australia which will further reflect in the
export price as well. Therefore Australia economy will lose market share to other rivals
countries leading to a loss for the beef producers. Additionally, this would further widen the
current account deficit and the trade deficit of the economy as well. Verdon-Kidd et al.
(2017) noted that wider the current account deficit, more is the vulnerability of the Australian
currency to the changes in the global economy. Therefore, eventually, there would be a
sudden instability in the economy. Furthermore, this instability would reduce the likeliness of
foreign investors to invest in the economy of Australia. According to Allen et al. (2015), poor
currency is one of the reasons for the reduction in inflation inflow. Therefore, drought can
reduce the investment inflow in various parts of the economy and hence the development of
the economy would stall.
Government’s policy
The government’s intervention in the wake of drought is important to bring the economy
back to its normal path. However, as discussed above, few of the policies of the government
would indirectly increase the impacts of drought in the economy. Therefore, it is important
for the government to implement actions that incorporate the previous actions of the
government as well (Chen et al. 2018). The most important government’s policy is the
increase in expenditure in different sectors. While this would increase the inflation level in
the economy this can also boost the aggregate demand as well. Therefore, the economy
suffering from the low aggregate demand would eventually revive from the problem.
Apart from that, the government can also reduce the interest rates in the economy in order to
intrigue the customers to spend more as part of the consumption expenditure. That would
increase the aggregate demand in the market (McGree, Schreider & Kuleshov, 2016) Lastly,
the government’s action to increase the production in other energy capacities of the country
can increase the energy supply in the market of Australia leading to a reduction in the
operational cost and hence the price level. Therefore, the actions of the government can

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actually, increase the aggregate demand in the market and reduce the inflation rate which can
then be followed by an increase in the foreign investment inflow.

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Reference
Allen, K. J., Lee, G., Ling, F., Allie, S., Willis, M., & Baker, P. J. (2015). Palaeohydrology in
climatological context: developing the case for use of remote predictors in Australian
streamflow reconstructions. Applied Geography, 64, 132-152.
Cbsnews.com. (2019). Australians suffer as heatwave knocks out power, fuels fires.
Available at: https://www.cbsnews.com/news/australia-heatwave-knocks-out-power-
fuels-wildfires-amid-drought/ [Accessed 27 Jan. 2019].
Chen, J., Liu, Y., Pan, T., Liu, Y., Sun, F., & Ge, Q. (2018). Population exposure to droughts
in China under the 1.5° C global warming target. Earth System Dynamics, 9(3), 1097-
1106.
Fowler, K., Peel, M. C., Western, A. W., & Zhang, L. (2016, December). Model calibration
for changing climates: lessons from Australian droughts. In AGU Fall Meeting
Abstracts. 63(3), pp.56-64
Kiem, A. S., Johnson, F., Westra, S., van Dijk, A., Evans, J. P., O’Donnell, A., ... & Jakob,
D. (2016). Natural hazards in Australia: droughts. Climatic Change, 139(1), 37-54.
King, A. D., Karoly, D. J., & Henley, B. J. (2017). Australian climate extremes at 1.5 C and 2
C of global warming. Nature Climate Change, 7(6), 412.
McGree, S., Schreider, S., & Kuleshov, Y. (2016). Trends and variability in droughts in the
Pacific Islands and Northeast Australia. Journal of Climate, 29(23), 8377-8397.
Saft, M., Western, A. W., Zhang, L., Peel, M. C., & Potter, N. J. (2015). The influence of
multiyear drought on the annual rainfall‐runoff relationship: An Australian
perspective. Water Resources Research, 51(4), 2444-2463.
Verdon-Kidd, D. C., Scanlon, B. R., Ren, T., & Fernando, D. N. (2017). A comparative study
of historical droughts over Texas, USA and Murray-Darling Basin, Australia: Factors
influencing initialization and cessation. Global and Planetary Change, 149, 123-138.