Drought and Macroeconomic Equilibrium: An Australian Economic Analysis

This essay examines the impact of drought on macroeconomic equilibrium in Australia, focusing on the effects of supply shocks on key macroeconomic variables such as GDP, unemployment, inflation, and interest rates. It explains how drought, as a negative supply shock, shifts the aggregate supply curve to the left, leading to increased prices and decreased quantity supplied. The analysis highlights the significant losses experienced by the agricultural sector due to drought, the resulting decline in agricultural commodity supply, and the subsequent rise in prices. The essay also discusses the financial and environmental costs of drought, including crop destruction, water irrigation expenses, and ecosystem damage. Furthermore, it touches upon the Australian government's policy responses, such as the National Drought Agreement, aimed at promoting drought preparedness and sustainable management practices. The essay concludes by emphasizing the long-term impacts of drought on water quality, land degradation, and overall economic stability, advocating for proactive measures to mitigate these effects.

Running head: ECONOMICS
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DROUGHT IN AUSTRALIA
Introduction
The natural disaster which generally takes place as a result of below average
precipitation on any kind of region which also resulted in the shortage of the water supply is
termed as drought. Farmers have known to face a lot of troubles in various places of
Queensland and New South Wales. Huge areas of Australia have been suffering from
droughts which took place for several years with dry conditions which will be comprising of
both federal and state states.
The key macroeconomic variables are the gross domestic product, rate of
unemployment, inflation and rate of interest. The macroeconomic equilibrium is a condition
in the economy where the quantity of the aggregate demand will be equal to the quantity of
the aggregate supply. Drought in most of the cases result to supply shock which results to
sudden decrease in the supply of commodities with the rise in price (Krugman, Obstfeld, &
Melitz, 2015). During the short run, the negative supply shock will be shifting the aggregate
supply curve to the left.

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P2
P1
Q2 Q1
AS1
AS2
ECONOMICS
Analysis
Figure 1 Negative supply shock as a result of drought
Thee supply curve shifts left as a result of the supply shock were the curve AS1 to AS2. For
this reason the price goes up to from P1 to P2. The quantity supplied also becomes less an
moves from Q1 to Q2. The drought had been comparatively drier compared to the other
years. According to the research the areas which are now to experience severe impacts of
drought are especially on the regions of South Australia, New South Wales as well as North
West Victoria. The effect of rain over the past few years in the western parts of Australia. In
the previous year the dry conditions are known to spread in most of the parts of Australia.
However, rain in most parts of Australia had made the conditions quite bearable for few
months (Recent Australian droughts may be the worst in 800 years.,2019). Many parts of
Albany in the south know to remain dry. After the drought of 1902, Australia had known to
suffer severe drought. One of the reason behind this kind of dry drought is because of the
absence of rain. Many parts of Illawarra and Albany had been suffering from the dry drought

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over past few months. The rain in Newcastle although did not bring any moisture no effect on
the parts of Australia. The winter also had been quite severe and harsh. Over the past fifty
years there had been decline in the rainfall. Some of the places in the south east are known to
have experienced some of the driest months. One of the reason of the dry weather is the high
pressure which existed on the eastern Australia. When there is presence of drought, the
agricultural sector is known to experience a huge loss in the economy (Krugman, Obstfeld &
Melitz, 2015). As the agricultural sector gets highly affected during drought the supply of
the agricultural commodities declines because of the rise in the barren lands as a result of
droughts. The supply curve is known to shift left as a result of decrease in the supply of the
agricultural products and therefore the quantity supplied also decreases. This results to
increase in the price. The point of equilibrium also changes from e to e1. For this reason the
agricultural goods will be becoming quite expensive in nature. Drought can cost both people
and money. Sometimes farmers will be losing huge amount of money when droughts are
known to destroy crops. When the supply of water will be sufficient, farmers need to spend a
lot money for water irrigation. Drought in Australia known to result in financial losses,
environmental damage, dying of crops, declining of water quality, huge amount of dust
storms and personal deprivations. Some of the droughts in Australia are long lived while
some of them are short and intense in nature. However, all types drought are known to cause
huge amount of damage to the ecosystem. In some cases thee east coast of Australia might be
in drought while the west coast experience huge amount of rainfall. The agricultural
ecosystem, during drought also known to suffer huge amount of damage. There will be huge
loss in the livestock where the growth of crops are known to be disrupted (Recent Australian
droughts may be the worst in 800 years., 2019). The declining of the agricultural
productivity affects both the national and rural economy. The impact of drought are felt for
many years.

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Droughts are known of degrade water quality and land and also affects the way the
land is used. 2018 had been one of the driest years in Australia with o rain. In some of the
parts of southern Australia, drought of the 21st century had been the worst in the past hundred
year. Droughts in Australia are also expected to become more prevalent in future. There are
four main types of drought that are meteorological, agricultural, socio economic and
hydrological in nature. Australia is also known to become one of the second driest continent
in the world. One of the reason of the dryness is Australia is under the subtropical high
pressure belt is known to push the air down which will be preventing the lift required for rain
(Recent Australian droughts may be the worst in 800 years.2019). As a result of drought
since drought is termed as the supply shock, there had been decrease in the gross domestic
product of Australia, there had been rise in the food prices which lead to inflation along with
huge rate of unemployment in the economy.
Conclusion
The government of Australia in the year 2018, signed a new National Drought
Agreement which sets out a joint approach for drought preparedness, recovery and responses.
The national Drought policy aims to encourage the primary producers of the rural Australia
for adopting various approaches to manage climate variability. It also aims to facilitate for
early recovery of agricultural and rural industries which are also known to be consistent with
long term sustainable levels.

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Reference list
Krugman, P., Obstfeld, M., & Melitz, M. (2015). International Trade: Theory and Policy:
Global Edition. Pearson Higher Ed.
Recent Australian droughts may be the worst in 800 years. (2019). Retrieved from
https://theconversation.com/recent-australian-droughts-may-be-the-worst-in-800-
years-94292