ECO511 Essay: Macroeconomic Effects of Drought & Policy in Australia

This essay analyzes the impact of drought on macroeconomic equilibrium in Australia, focusing on the supply shock caused by reduced agricultural output. It discusses the effects on unemployment, inflation, and the overall economy, referencing the Australian Bureau of Meteorology and historical droughts. The essay also explores how government policies, such as subsidies, loan reliefs, and fiscal measures, can modify the macroeconomic impact by addressing unemployment and stabilizing prices. The analysis incorporates diagrams to illustrate supply shocks and concludes that droughts significantly disrupt macroeconomic equilibrium, necessitating government intervention. Desklib offers a range of study tools and resources for students.

Running head: ECONOMICS
Economics
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Australian drought
Introduction
Macroeconomic equilibrium in the economy is that state where the supply of the
economy equal the demand of the of tee economy. The changes in the variable of macro
economy will be having an impact on the rate of unemployment, price and also on the rate of
inflation. The variables of macro economy is known to affect a large population and is also
related to the economy at the national level. The variables of the macro economy comprises
of the inflation, savings, output of the economy along with unemployment. The factors of the
macroeconomic equilibrium are known to be the indicators of the performance of the
economy that are known to be monitored by either the government or the consumers. When
the precipitation happens which are below the average level, at that time drought takes place.
Drought takes place when there is a prolonged shortage of water supply. The droughts
usually takes place as a result of deficiency of rain, climatic changes, erosion from various
human activities and dry season of El Nino.
Analysis
Effect on the macroeconomic equilibrium as a result of drought.
According to the Australian Bureau of Methodology, drought takes place in Australia when
the precipitation will be in the lowest docile for over three months when compared to the
previous year. Between the year 2003 and 2012, one of the worst drought takes place. Here
are presence of many regions in Australia, where the low amount of rainfall led to drought. It
has been found out that since the year 1994, the global warming and the changes in climate
are some of the reasons of the drought in Australia. The decrease in the amount of rainfall
started taking place from the year 2013 in Australia, that lead to a huge period of drought in
some of the paces in Queensland. In some cases drought in the region of New South Wales

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lead to huge amount of crop failure in the year 1838. At the time of Federation, it have been
found out that Australia had suffered a huge amount of drought.
Drought in most of the cases shifts the supply curve to the left which leads to the
negative supply shock in the economy. The supply shock in the economy generally takes
place when there is sudden decrease or increase in the services or goods in the economy.
The sudden change in the supply curve is known to impact the equilibrium price of the goods
and services in the economy. During the short run, the supply curve will be shifting to left
which leads to decline in the quantity for output produced and also will be increasing the
level of price in the economy. A huge rate of unemployment takes place in the economy as a
result of drought. The unemployment was severe in the case of the agricultural sector. A huge
amount of people have known to become jobless mostly in case of agricultural sector. The
unemployment in case of the agricultural sector have known to affect the jobs in case of
manufacturing sectors. Most of the people have known to lose their jobs in the sectors of
food processing industry. The production of agriculture have declined with the decrease in
the amount of mixed farming and growing crops. This above situation takes place when here
is a negative supply shock as a result of drought in the economy. When the supply curve are
known to shift left in the economy, the supply of jobs declined as a result of drought.
Demand of jobs rose sharply compared to the supply of the jobs. For this reason, it can be
said that as a result of drought, employment will be declining in the economy. Drought have
also known to take place because of the crop failure. When the failure of crops takes place it
can lead to inflation, hot summer weathers along with dry summers leading to crop shortfalls
in case of Australia. As a result of the adverse conditions of weather, the production of crops
had been extremely in nature. The decline in the crop production leads to inflation in the
economy. Inflation takes place in the economy when there is an increase in the price of goods
and services in the economy over a long period of time. Inflation is a kind of quantitative

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measure at which the price of basket of goods in the economy will be increasing over the
period of time. Inflation resulted to the rise in the price of commodities mostly in case of
agricultural commodities. The continent of Australia have known to suffer from extreme
climatic conditions. Heatwaves, fires, drought and flood takes place quite frequently.
Blistering heat along with droughts are a common phenomenon in case of drought. The
Millennium drought in case of Australia known to be devastating in nature which took place
in both south-western and south eastern Australia.
The millennium droughts takes place as a result of poor rainfall in the cool season.
Federation drought have known to affect the Australian continent which took place as a result
of scanty rainfall in the warm season. New South Wales in Australia, have been entirely in
drought. The dry winter in case of Australia I rennet decade had been termed as one of the
worst drought that took place as a result of drought. The autumn of Australia had also been
quite dry for few months. One of the reason of drought which took place in new south wales
was that the amount of rainfall had been less than 10 mm. the millennium drought which took
place between 1997to 2005 was known to be one of the devastating drought in Australia. This
type of drought is known to severely affect the ecosystems of the agriculture and river of
states like Victoria and the Murray – Darling Basin, which is also the largest river system of
Australia. In the global scale, the drought in Australia took place as the reversal in the
intensification of the water cycle. The effect of drought ad been stated as the meteorological,
agricultural, hydrological as well as socioeconomic in nature which are the contributors of the
climatic change and water management will be affecting the future.
Effect of drought on economy
Drought also has a huge impact of economy in case of Australia. The gross domestic
product of the farm in Australia as a result of drought declined by 24 percent in the year

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2003where the rural exports known to have declined a lot. It has known to decline the
employment rate by one lakh people. For the decline in the supply of goods, the prices of
goods have also increased sharply. The livestock prices have known to increase the price of
the goods especially in case of quality breeding stock. Australian horticultural production are
known to get hugely affected by the drought. The recovery from the Australian drought took
place in the year 2003 and 2004 which also lead to improvement in the production of grain.
The Australian drought have known to subtract one percent from the gross domestic product
between the years 2003 and 2004. It has known to reflect the overall improvement in the
production of food grains. The Australian drought after the year 2003, the gross domestic
product are known to increase more than 20 percent. The Australian drought more
specifically affected the agricultural production. Drought is known to have affect the fortunes
of the farming business and on rural communities where they operate. The Australian climate
is not stable in nature and are quite prone to the drought. Droughts have known to impact on
the fortunes of the farming business and on rural commodities where they likely to operate.
The Australia climate is such that they are variables in nature and are mostly prone to
drought. The droughts re also known to affect the agricultural yields of Australia. It have
also contributed to the growth to the rise in the prices of food. The recent drought will be
raising the price of commodities and services.
The rise in prices have known to increase the consumer price index twice. The prices
of fruits as well as the vegetables are known to be devastated hit since the price have
increased a lot. In 2007, the ANZ bank stated drought as the main objective for the increase
in the prices of food. The impact of the climatic change can be stated as one of the factor
which are known to be associated with many factors that will be raising the food prices
higher. When there is climatic change, the food prices will be going upwards. The severity of
the droughts will be increasing as a result of change in climate. Droughts have increased to

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forty percent in the recent decade. The drought conditions are known to be worse when there
will be high emission and therefore it is known to have the negative impact on the Australian
ecosystem.
The government intervention as a result of drought.
The government will be planning for the mitigation of drought by providing subsidies
for seeds and more amount of diesel to the farmers. The government also known to have
reliefs from the loans and interest. He can also help the farmers with various plans of
irrigation where there will be scanty rainfall. The government will be changing the amount of
tax. He will be also be fighting for unemployment with the help of monetary and fiscal
policies. The changes in tax by the government will be helping to achieve full employment.
The government will also change the tax rate and spending for changing the jobs and
unemployment in the economy. When the government will be changing its spending. It will
be helping for the achievement of full employment and price stability in the economy. The
government will be changing the price level and employment through the fiscal policies. The
fiscal policies will be affecting the demand where there be changes in the government
spending along with taxation. The spending of the government along with the changes in the
taxation will be influencing the level of employment and the household income which is
known to be the consumer spending and investment. The Reserve Bank of Australia will be
targeting the full employment where the growth of the wage will be matching the
productivity levels. The inflation takes place when there is growth in the economy as a result
of increased spending.

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Figure 1 Supply shock as a result of drought
The government will be declining the inflation rate for reduction in the money supply
or with the help of contractionary policy. The goal of the contractionary policy is reduction of
the money supply. The prices of the bond have declined and will rise in the interest rate. The
government will control inflation. The government will also increase the ceiling of the
subsidy in seeds. For this reason, the government will raising the ceiling of the seed subsidy
and will be saving the horticultural crops. He can also implement various kinds of fodder
development program by priding loans to the farmers as a result of drought.
Conclusion
Droughts in general have a huge impact on the macroeconomic equilibrium where in
most cases it result to supply shock which will lead to inflation, hot summer and excessive
dry weather which lead to huge shortfall of crops in Australia. As a result of adverse weather
conditions the production of crops had been hugely affected and therefore lead to inflation in
the economy.

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Reference list
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