Australian Economy: Equilibrium Analysis and Economic Assessment

This report provides an analysis of the Australian economy's equilibrium. It begins with an introduction to the concept of economic equilibrium, discussing different types of equilibrium as defined by economists like Schumpeter and Marshall. The report then delves into the analysis of the Australian economy, focusing on aggregate expenditure (AE), its components (consumption, investment, government spending, and net exports), and its relationship to GDP. It explains how the ORANI model is used for economic analysis in Australia and examines key economic indicators such as GDP growth, exports, unemployment, and inflation. The report highlights the impact of unemployment and inflation on the equilibrium state and concludes with an assessment of the Australian economy's performance, emphasizing the need for policies to address unemployment, inflation, and sustainable mining practices, while also considering the impact of household savings on long-term economic stability. The report includes a bibliography of the sources used.

Economic Assignment
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Table of Contents
Introduction...........................................................................................................................................3
Analysis..................................................................................................................................................3
Conclusion.............................................................................................................................................7
Bibliography...........................................................................................................................................8
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Introduction
Equilibrium means equal balance. It comes from two Latin words named ‘acqui’ (Equal) and
‘libra’ (Balance). Equilibrium is widely used in Physics referring to a state of balance.
Equilibrium is also used in Economics to a balance when two opposing forces do not
influence to change each other. When no further change is possible, we can say that the
Economy is in equilibrium.
Prof. Schumpeter stated three types of equilibrium, namely neutral, stable and unstable
equilibrium with an example of a ball in a billiard table. He referred that when a ball is
resting at the bottom of a bowl, it is in stable equilibrium. When a ball is resting on a billiard
table, it is in neutral equilibrium. And when a ball is perching on the top of the billiard table,
it is in unstable equilibrium.
An Economy is said to be stable when the disturbing factor can be adjusted by its own.
Marshall explained it further that when the demand price is equal to the supply price, the
amount has a tendency to be fixed. It is in equilibrium and this type of equilibrium is stated as
stable equilibrium because if the price is displaced a little, it has a tendency to get back to its
original position.
Stable Equilibrium
Analysis
Now we must know the aggregate expenditure of Australian economy to know whether it is
in equilibrium state or not. Aggregate expenditure is the current value of all the finished
goods and services in the said economy. The equation for aggregate expenditure is:
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AE = C + I + G + NX
Where C = Consumption
I = Investments
G = Government spending
NX = Net Export
Consumption means the household consumption over a period of time. Investment means the
amount of expenditure towards the capital goods. Government expenditure means the amount
of spending by federal, state and local government. Net exports mean total exports minus
total imports. Aggregate expenditure is to determine the total amount spent by firms and
households at each level of income.
This aggregate expenditure helps to calculate all the economic activities in an economy and
the total sum of those activities is known as the Gross Domestic Products (GDP). GDP is
most important in any economy as it has ability to measure the growth of the economy. An
economy is said to be in equilibrium when aggregate expenditure is equal to the aggregate
supply. Here aggregate supply is the total production of that economy. The economy cannot
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be in a state of equilibrium constantly. Rather the aggregate expenditure and aggregate supply
adjust to each other.
There are several models to analyse the Economy is in equilibrium state or not. ORANI is an
Applied General Equilibrium (AGE) model which is used in Australia. It was first developed
in 1970 as a method for practical policy analysis as a part of government sponsored IMPACT
project. Initially it was static but now it contains dynamic elements arises from stock or to
flow accumulation. This model has extended to include systems of government accounts and
regional breakdown. ORANI-G is a static AGE model with theoretical structure where G
stands for Generic. It consists of various equations:
o Producers’ demand for produced inputs
o Producers’ supplies for commodity
o Demands for inputs to capital formation
o Household demands
o Export demands
o Government demands
o Relationship of basic values to production costs and to purchasers’ prices
o Market clearing conditions for commodities and primary factors and
o Others macroeconomic variable and indices
The GDP in Australia was about 1204.62 billion US dollars in 2016.
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Australian economy is dependent on exports, mining, tourism etc. Exports have a steady
growth rate of average 7.9%. The mining sector is not in a boom now but still it is
contributing 1.1 percentage points towards the annual growth. Australia's government debt to
GDP is the second lowest in the OECD.
Australia also had the best job growth in the OECD following the crisis.
Australia’s unemployment rate has hit a 14-month high, rising to 5.9% in February, widely
missing expectations of a flat rate of 5.7%.
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Australian economy is facing unemployment in the month of March, 2017. The total number
of people lost their jobs is 6,400 in February, 2017, stated by the Australian Bureau Statistics.
Kate Hickie said that the expected employment growth to remain modest and the
unemployment rate will probably remain around 6% this year. If this situation continues
further, then RBA has to tackle by cutting further rate. This thing must have impact on
equilibrium state in long run as well as short run.
The annual rate of inflation has crept above 2% for the first time in two years but most
economists say that RBA would not change interest rates anytime. Petrol price rises up 7.5%
and electricity price rises up 2.5% but drop in prices by 6.7%. It lifted the annual CPI rate to
2.1% and just inside the Reserve Bank’s 2% to 3% target band.
Conclusion
Australian economy has shown a solid performance in Q2 of 2017 irrespective of Q1 2017.
Growth is resulted by strong government and household consumption which has positive
impact on net exports. This instrument has benefitted from increasing in commodity prices.
Still the economy remains in vulnerable condition. Unemployment and inflation are both
have to manage with specific measurements by RBA. Mining is not a boom but it has a great
impact on economy till now. So policies need to create for ensuring sustainable mining in
economic development of Australia. Most worrying fact is private consumption, which is not
due to strong wage growth but due to lesser amount of household savings which has negative
impact in long run of Australian economy. But fortunately unemployment is gradually getting
pushed down and consumers are regaining confidence which is instrumental to lift retail
sales.
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Bibliography
Academy, K. (n.d.). How the AD/AS model incorporates growth, unemployment, and inflation.
Retrieved 09 22, 2017, from
https://www.khanacademy.org/economics-finance-domain/macroeconomics/aggregate-supply-
demand-topic/aggregate-supply-demand-tut/a/how-the-ad-as-model-incorporates-growth-
unemployment-and-inflation-cnx
Daniel Rees, P. S. (2015). A Multi-sector Model of the Australian Economy. Reserve Bank of
Australia .
Denniss, R. (2012). The use and abuse of economic modelling in Australia .
Economics, F. (2017). Economic Forecasts from teh World's Leading Economists. Retrieved 09 22,
2017, from Focus Economics: https://www.focus-economics.com/countries/australia
Horridge, J. M. (2017). ORANI-G: A General Equilibrium Model of the Australian Economy. Retrieved
09 22, 2017, from Ideas: https://ideas.repec.org/p/cop/wpaper/op-93.html
Hutchens, G. (2017, 03). Australia Employment Statics. Retrieved 09 22, 2017, from
https://www.theguardian.com/australia-news/2017/mar/16/australias-unemployment-rate-rises-to-
59-with-6400-jobs-lost-in-february
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