Analysis of Aggregate Demand and Supply in the Australian Economy

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Macroeconomic conditions in Australia
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Contents
Question................................................................................................................................................3
Theories\Models of aggregate demand and aggregate supplies.......................................................3
Effect on the Australian economy due to the fall in the growth of Chinese economy.....................5
References............................................................................................................................................8
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Question
solution
Theories\Models of aggregate demand and aggregate supplies
The construction of the economy of Australian, is continuously growing in answer to the
international and domestic forces that in themselves are regularly changing. In the last half decade,
the service sector has been continued its unavoidable growth, despite of the fact the mining sector in
the Australia has acted a reflection in the comeback so as to enhance the global demand for the
commodities (Charlton, 2015).
Structural change means a process through which the economy is gradually changed over the
time.In the rouse of the 2007 global financial crises, the policy makers recognized the need for the
framing the theorise of aggregate demand and aggregate supplies. Changes can be in the industries,
or within the industries or it may be possible that it may at the level of the firm(Bamaitzi, et., al.,
2015). Till the date a most affected change occurred is at the level of macro economics which
affects most the industries and the firms but in a different way that are as discussed below:
 Decline in the global real interest rates- since 1990, there are lots of fluctuations come in the
global real interest rate because of the decline in the inflation rate, which ultimately results
in the fall in the investment prices and the levels of saving throughout the china and rest
Asian countries.
 Decline in the prices of the venture goods.
 Decline in the prices of manufacturing goods in all over the world.
Before proceeds let us first understands the aggregate demand/aggregate supply model. –
this model is among one of the fundamental tools which provides the complete framework
for bringing these factors together in one graph(Charlton, 2015).
Progress and depression in the aggregate demand and aggregate supply- these two can be evaluated
in respect of the GDP(i.e. gross domestic product). Aggregate demand/supply diagrams can be
drawn for the long-term or for the short-term economic growth.
Aggregate demand curve shows the combination of all the individual demand curves in the whole
economy that means it shows the relationship between the total price level and the total quantity of
output demanded whereas aggregate supply curve shows the aggregate of individual demand
curves(Bamaitzi, et., al., 2015). When there is increase in the demand then curve will gradually shift
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to the right side and the vertical line in the graph shows potential gross domestic product on the
other side the full employment level of GDP slightly sifts to the rightward direction over time as
well. Individual can see this in the below diagram, which describes a pattern of the economic
growth for the three years. So, the factors that recognises the speed of the economic growth rate are
technology, investment, human capital etc(Knop and Vespignani, 2014).
In the short run fall or rise in the economy the aggregate demand or supply shifts rightward or
leftward as per the recession or depression in the economy. And the factors that affects the
movement of the curve are same as in the long-term demand curve only one factor is different from
above that is fixed capital(Aravanis, 2019).
(Aravanis, 2019)
Aggregate supply or aggregate demand model is the only ultimate tool in the macro economics
because this provides an overall structure for carrying all the economic factors in one
diagram.When the equilibrium is substantially below the GDP then returning redundancy is
relatively great in the AS/AD structure and when the equilibrium is near to the GDP so at that
timeso is relatively small(Charlton, 2015).
Aggregate demand and aggregate supply are also a source for showing the inflationary pressures.
And inflationary situation means it shows the rise in the pricesand decrement in the demand for the
goods and services. a situation when the prices are increases at that time the aggregate supply will
shift towards the left side and in the case if deflation the prices are decreasing and hence the supply
curve will shift towards the right side(Bamaitzi, et., al., 2015).
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Aggregate demand is also caused by the inflationary pressure, in the situation of the inflation the
aggregate demand will shifts towards the right side and the economy isclose to the full employment
and the required GDP and at the same time this demand curve also pushes the supply curve. As in
the above diagram(a) this is clearly seen that the demand curve is shifted to the right side and the
new equilibrium that derive is denoted by E1 and this is at the higher price as compared to the
original equilibrium that is E0(Bamaitzi, et., al., 2015). In this type of situation, so the total demand
in the economy has been too much high that all the firms in the economy are not been able to
produce extra goods and services because all the capital that is denoted by ‘K’ and the labour that
is denoted by ‘L’ are fully employed, so this extra production will lead to the rise in the prices and
the also results in the shift in the demand curve(Aravanis, 2019).
Effect on the Australian economy due to the fall in the growth of Chinese economy
In the recent times the growth of the Chinese economy is seems to be slow that is at the 6.5%
annually, still there is a quick leap that is compared with all the things happened in the developed
countries but this is approx.half of the rate that other countries had been shaking up for more than
twenty years. As per the various data that is published in the newspapers it is clear that the activities
that related to the manufacturing are contracted for the 1st time in the approx. one year. Even after
providing some discounts firms are facing low demand for their products. The declining growth rate
creates tension in the country because it effects the trade of country with the other countries like
united states, which are deep athwart international markets. Furthermost particularly, Apple who
declares the downfall in the earnings in the starting month of 2019, due to the smaller number of
units sold in china to the declining demands of the consumers and rising of the ambiguity in
economic market.
As compared to other countries, Australia is exposed more due to a downturn in the Chinese
economic growth rate because china is the chief trade partner of Australia that is approx. 30.6% of
the export is from the china where as japan is second major partner pf Australia and generates
approx. 12.7% of export(Charlton, 2015).
In Australia the major industry that is affected by the slowdown of the Chinese economy is the
mining exports, as black coal and iron ore mining industries generates approx. $64 billion that is
about eight % of the Australia’s export revenue generated from the china. There were few new
projects also started which is related to the iron ore also get affected by the slowdown of the
Chinese economy(Knop and Vespignani, 2014). Moreover, Australian producer of ore perform
better as compared to their other competitors like Hancock Prospecting, Rio Tinto and BHP because
they are more threatened of the fall in the Chinese economy. As the news of IBISWorld industry of
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black coal mining generates a revenue of $52.1 billion which is 30% of revenue that generated from
the china and it is forecasted that in the coming 5 years Chinese demand for the black coal will
decline because contracts of steel production are in lined with the fall in the economic growth. with
the fall the demand for the steel rose up(Bamaitzi, et., al., 2015).
In the Australian education sector also the effect of the Chinese slow economic growth seen, as the
universities and the other higher education institution are extremelydependent on the demand of the
students of other countries, in these practically the students of the china. Every year approx. 12%
students enrolled are from china, around $32.4 billion of revenue comes from these 12% Chinese
students, so downfall in the chines economy means those students choose for the domestic
education which results in decline of these revenue that means it affects the economic growth of the
Australia(Knop and Vespignani, 2014).
Australian tourism also gets affected from the fall in growth rate of Chinese economy as every year
around 9.2 million tourist visits the country, and from these figures around 1.43million tourists are
from china. Those 1.43 million people spend $11.5 billion on purchasing services and goods from
Australia, so this amount contributes in the growth of the Australian economy and the second
largest tourist country is New Zealand i.e. 1.38 million people visits Australia and spends some
billion dollars in purchasing the dollars and services of the Australia like footwears, clothing,
jewellery and watches etc so this increases revenue of lots of sectors and hence overall development
of the Australian economy but due to the fall in the Chinese economy and this threatened many
industries of the Australia and also Australian economy is also declining(Bamaitzi, et., al., 2015).
The airline industry also gets affected by the downfall of the Chinese economy. Those tourists who
comes to visit the Australia are come using airways so benefited airline industry in producing the
revenue and when there is reduction in the demand of tourists leads to reduction in the revenue of
the airline industry.
From the viewpoint of trade, Australia provoked on the 2008-09 worldwide financial crises, starved
of dropping into decline primary because of the vigorous Chinese demand for the Australian
exports(Aravanis, 2019). From the decades, the trade relationship of the Australia protects it from
the slowdown economy but as the economy of the china comes down this causes risk for the
Australian economy also. From the few months there is trade war going on between the china and
the united states and still that was not resolved and comes at a situation where both the countries are
revoking their trade agreements, so the tariff on the goods exported to the united states will
inevitably increase up to 25% and hence, this is a great risk for the economy of the many
countries(Charlton, 2015).
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From the few months there are various down thing happens in all over the world due to the trade
war between the china and the United States and that trade war affects not only china or the united
states but its effect had been seen throughout world. Those countries which are in the trade
relationship with china are now break their agreement with the china because as per the world banks
report the power united states is more as compared to china, so the countries are no more trade with
the china and this adversely affects the Chinese economy and this also affects not only the Chinese
economy but other countries economy also(Aravanis, 2019). Many of the worldwide are attracted
by the less labour costs also the inexpensive supply materials, that are available in the
manufacturing company in the china, the technology that china is using is also attracted many
manufacturing companies towards china but due to the downfall in the Chinese economy, the
material of the china and the technology of the china used in the domestic country only.
The concept of the aggregate demand and the aggregate supply also helpful in understanding the
relationship between the effect of the downfall in the Chinese economy on the Australian
economy.In the initial stage everything was in the equilibrium, because as per the demand the
supply of the goods and services does, but when the fall in the Chinese economy was recognised at
that time the demand of the china will reduce and hence the supply of goods and services from the
Australia decreased so their was a moment in the AD/AS curve, and it was also noticed that the
situation that arose at that was inflationary situation because the demand was decreased and the
prices of the goods and services increased(Bamaitzi, et., al., 2015).
So, all these situations will hamper the economic condition of the Australia, because of the decrease
in the revenue generation sources and the supply of the domestic goods to the international
countries, the number of tourists visits to the Australia were also declined and the trade with the
other countries were also reduced so all those factors were responsible for the downfall in the
economy of the Australia(Knop and Vespignani, 2014).
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References
 Aravanis, J., (2019), “China’s GDP Decline to Affect Various Australian Industries”.
 Bamaitzi, V., Bozos, K., Cavusgil, T, S., And Hult, M, T, G., (2015), “Revisiting the firm,
industry, and country effects on profitability under recessionary and expansion periods: A
multilevel analysis”.
 Charlton, A., (2015), “China’s rising impact on Australia’s economy”.
 Knop, J, S., and Vespignani, L, J., (2014), “The sectorial impact of commodity price shocks
in Australia”.
 Lin, B., and Jia, Z., (2018), “Impact of quota decline scheme of emission trading in China:
A dynamic recursive CGE model”.
 Ouyang, X., and Lin, B., (2015), “An analysis of the driving forces of energy-related carbon
dioxide emissions in China’s industrial sector”, Volume45, pp-836-948.
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