Growth Policies And Macroeconomic Stability -Myassignmenthelp.Com

Question: Discuss About The Growth Policies And Macroeconomic Stability? Answer: Introduction Free market is a market condition where demand and supply forces works independently to bring equilibrium for the market. The equilibrium once obtained maintains a stable state without presence of any external forces. The term stable equilibrium refers to a state of rest where any fluctuation from this position automatically back to its original position. The economy of a nation is said to be stable if stability is maintained in different macroeconomic indicators such as GDP, price level, employment state and even for the external sector of the economy. In this paper, current state of Australian economy is analyzed to examine the stability of the economy. What is meant by stable equilibrium Equilibrium is a position where all the active forces are at rest. The forces work in free market is the force of demand and supply. Demand curve represent the preference and buying decision of the buyers whereas supply curve corresponds to the decision of sellers. Equilibrium price is that price where willingness to pay of buyers matches with the price cat which sellers willing to sell the goods (Garda Ziemann, 2014). Corresponding to this price equilibrium quantity is determined which is the quantity supplied in the market based on the demand of buyers. Any upward or downward movement of the equilibrium price means mismatch between supply and demand creating either excess supply or excess demand situation. Market cannot sustain with excess supply or excess demand. To maintain balance between supply and demand prices is used as an adjustment tool. Figure 1: Demand, supply and economic stability (Source: As created by Author) In the figure above, P* and Q* imply the equilibrium price and quantity respectively obtained where demand curve cuts the supply curve. Now suppose price is somewhere above the equilibrium price. This will create an excess supply situation as at the higher price, buyers demand less and seller supplies more. To sell the excess supplied quantity price has to be reduced otherwise the excess quantity is wasted leading to wastage of resources and hence making market inefficient. Conversely, if price is down the line of equilibrium price then there will be excess demand because at low price seller supplies less where buyers demand more (Fisher, 2016). To meet the excess demand price has to be increased to encourage supplier to supply more and reduces some demand. This explains how price works as an invisible hand to restore stability in equilibrium. Government intervention The price and quantity determined in the free market may seem too high or too high in special circumstances. Then government need to intervene and sets an optimum price either above or below the equilibrium price. Government often put a ceiling on price if it considers equilibrium price is too high. The minimum price set by the government above the equilibrium price is called a price floor (Lewin et al., 2016). In the presence of externality either a greater or a lower quantity is supplied. In this situation also government intervenes to correct external distortion and ensure optimum quantity for the society. Stability Analysis for Australian Economy When it comes to a countrys economy then analysis of a single market is not sufficient. The stability of the entire economy depends on macroeconomic stability. It is the aggregate demand and aggregate supply that is considered here. Aggregate demand is the demand for entire economy and aggregate supply is the total supply quantity available (Robinson, Nguyen Wang, 2017). The intersection of aggregate demand and arrogate supply determines GDP or income and price level of the economy. Gross Domestic Product is the monetary value of all goods and services produced in the economy. When GDP is stable then this means there is no major fluctuation in economic activity. For this, current GDP values of Australia are considered. Figure 2: Real GDP in Australia (Source: tradingeconomics.com) Real GDP is the measure of actual measure of national output, computed at a fixed base year prices. The figure shows there is no notable fluctuation in recent GDP trend (Sutherland and Hoeller, 2014). GDP grows gradually indicating towards a stale economy. Price level Movement of price level is an important determinant of economic stability. Price level is desired to be in stable state for overall stability of the economy. Any gradual upward movement of the existing price level is known as the inflation rate. A stable inflation rate implies a stable price level. However a low to moderate level of inflation is needed for boosting up the economy. Figure 3: Recent inflation trend in Australia (Source: tradingeconomics.com) Recent statistics shows price level in Australia is moving upward at a slower pace. Highest inflation rate is 2.1, recorded in the month of March 2017 (rba.gov.au 2017). After that price level started falling. This shows currently price level in Australia is at a stable state. External Stability for Australian Economy Australia engages in international transaction with several countries in the world. External relation of Australia is defined not only in terms of but it also explains investment made abroad. Because of significant influence of external economies on Australian internal economies the government gives priority on maintaining external stability. External stability is indicated from the balance of payment account. Balance of payment account keeps record of all international transaction. Balance of the external economy in Australia has improved with an export boos resulted from economic boom (smh.com.au, 2017). This ensures stability of external account. Conclusion The report explains stability using both microeconomics and macroeconomics perspective. Microeconomic stability concerns with stability in only one market whereas macroeconomic stability is defined in terms of aggregate demand and aggregate supply. In this context current state of Australian economy is analyzed. Two major indicators, GDP and price level are focused. Neither GDP nor price level constitute any notable fluctuation, thereby indicating a stable state for Australias internal economies. The external economy of Australia is also important for stability analysis. Improvement in balance of payment owing to trade surplus helps in bringing external stability. Reference Australia GDP | 1960-2017 | Data | Chart | Calendar | Forecast | News. (2017).Tradingeconomics.com. Retrieved 13 September 2017, from https://tradingeconomics.com/australia/gdp Fisher, F.M., 2016. Adjustment processes and stability.The new palgrave dictionary of economics, pp.1-6. Garda, P., Ziemann, V. (2014). Economic Policies and Microeconomic Stability. Lewin, P., Lewin, P., Cachanosky, N. and Cachanosky, N., 2016. A financial framework for understanding macroeconomic cycles: The structure of production is relevant.Journal of Financial Economic Policy,8(2), pp.268-280. Measures of Consumer Price Inflation | RBA. (2017).Reserve Bank of Australia. Retrieved 19 September 2017, from https://www.rba.gov.au/inflation/measures-cpi.html Robin, M. (2017).Record trade surplus is good news for our AAA rating.The Sydney Morning Herald. Retrieved 19 September 2017, from https://www.smh.com.au/business/the-economy/australia-celebrates-record-trade-surplus-as-exports-boom-20170202-gu3t09.html Robinson, T., Nguyen, V. H., Wang, J. (2017). The Australian Economy in 201617: Looking Beyond the Apartment Construction Boom.Australian Economic Review,50(1), 5-20. Sutherland, D. and Hoeller, P., 2014. Growth policies and macroeconomic stability.OECD Economic Policy Papers, (8), p.3.