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Economics Assignment

(a)The total value of final goods and services measured at market prices and that are produced within the domestic territory of Australia within a given period of time is the gross domestic product of Australia.

The first main point to be considered is that it takes the market value of all the final goods and services. It does not allow for the value of intermediate goods. Intermediate goods are those goods which are further used in the production of other goods For example, wood, steel etc. Final goods are the goods which are either used as consumption or for the purpose of investment. If the milk is used for consumption, it comes under the category of final goods. Whereas, if the milk is used in the production of cheese and butter by other industry, it will be called as an intermediate good.

Gross domestic product does not differentiate whether the commodities are produced by the residents or the non-residents. It considers only that the goods and services arte produced within the geographical location of the country. Unlike gross domestic product, gross national product measures the market value of goods and services which are produced by the residents of the country irrespective of the location of the production of goods and services (Weible et al., 2020). Gross national product can be evaluated by adding gross domestic product and net factor income from abroad (NFIA). Net factor income from abroad is obtained by subtracting income paid to the foreigners who are working in the domestic territory of Australia from the income received from abroad for the goods and services produced by the residents abroad.

Gross Domestic Product = Goss National Product – Net Factor Income from Abroad

The reason it is called gross domestic product is that it does not allow for the depreciation of machines and equipments. Net domestic product can be defined as the value of final goods and services which are adjusted for depreciation and produced within the domestic territory of Australia within a given period of time. Net domestic product is obtained by subtracting depreciation from the gross domestic product.

Gross Domestic Product = Net Domestic Product + Depreciation

Gross domestic product is calculated basically to judge the economic growth of Australia. Economic growth can be defined as the change in the percentage in real gross domestic product. Real gross domestic product is adjusted for inflation and shows the total economic output which is produced within the domestic territory within a given period of time and is calculated at pre-determined base market price. Gross domestic product is given by the Australian Bureau Of Statistics in every three months (Wenham et al., 2020). From the figures of gross domestic product, economic growth of Australia is calculated. Thus, we can say whether the economy is growing or not.

If the economic growth is positive, then the econmy is growing. If the economioc growth turns out to be negative, then the economy is contracting. The economy is said to be in recession, if the economic growth is contracting for more than 2 quarters.

The above flowchart shows that there are three methods to measure the gross domestic product of the Australian economy. The Australian Bureau Of Statistics collects data from all the economic agents of the economy, that are, households, businesses and government agencies. Then, the Australian Bureau Of Statistics calculates the gross domestic product from all these three different methods.

The first method which is also called the output method is calculated by adding the value of all goods and services produced by the primary, secondary and tertiary sector within a given period of time.

The other method is the income method. In this, the income of all the employees, businesses are summed up including the taxes and excluding subsidies.

The last method is the expenditure method. It is calculated by adding the expenditure by all households, businesses and government on the final goods and services. It is calculated as:

Gross Domestic Product = C + I + G + (X – M)

Here, C is consumption spending by the households. I refers to investment by businesses and G shows the government expenditure. X is the exports of goods abroad and M is the imports of goods by the people of Australia.

An example using data of year 2019:

Components of Gross Domestic Product of Australia (Amount in trillions):

C = $15.28 ; I = $3.42 ; G = $3.30 ; X = $2.53 ; M = $3.49

GDP = 15.28 + 3.42 + 3.30 + (2.53 – 3.49)

GDP = $19.07 trillions.

(b) The outbreak of Covid-19 was started from Wuhan, China in December 2019. It was declared as Covid-19 pandemic which is also known as Corona virus pandemic by the World Health Organisation. The disease spread rapidly across different countries worldwide. It was reported in more than 188 countries and territories.

The outbreak has led to social, economic and global disruption. This pandemic has led to the largest global recession after the great depression. The pandemic has caused postpone of various events like religious, cultural and political. A state of panic buying is created by the customers in the economy. Panic purchasing can be defined as consumers buying large amounts of goods due to their expectations of increase in prices of goods or shortage of the goods. There is a threat of a crisis and scarcity of commodities among the individuals. This fear is caused due to the uncertainty. The pandemic has also led to closure of the schools, colleges and universities.

The major steps to prevent the spread of the Corona virus have taken but all in vain. It was seen disturbance to the Chinese economy and the following transmission to the rest of the world. As the virus spread, the movement of people across different countries become constricted. Also there was disruption seen in the supply chains.

The impacts of the Corona virus disease on the economy of Australia were felt on the domestic businesses. These businesses depend on the motion of people from China to Australia, for example student and non-student tourism. Also there were many arbitrary expenditure businesses which the economy of Australia was exporting to China. All these activities were brought to halt.

There were movement seen in the commodity prices and the Australian dollars. As people expected that the prices will rise when the Chinese Government will stimulate the economy with the help of spending in infrastructure. These expectations in the rise of prices actually led to the rise in prices of the commodities. The biggest trading partner of Australia is China. This is majorly because of high demand of iron ore, natural gas and coal by China (Smith & Judd, 2020). Also the mining companies of Australia highly depend on China. Thus, the economy of Australia is highly affected by this pandemic. Australian dollar is considered as a substitute for the Chinese Yuan. The increase in the number of corona virus cases in China led to the slowdown in the Chinese economy. This further led to depreciation of the Australian dollar against the United States dollar. The level to which the Australian dollar is depreciated is really big and is not seen since the global financial crisis (GFC).

It is believed that there will be a reduction in the labour input. This is due to the virus as the sick people would not be in a position to work. Thus, there will be a shortage of labour and reduction in the labour supply in Australia. Also, the corona virus is leading to a reduction in the workforce. This is due to large number of people dying because of this disease. Also, due to breakdown in the supply of chains, it will further lead to fall in the productivity of capital and idle capacity in the economy (Hall, 2020). The effect of this pandemic is felt in the cost of the inputs used by the industries. There is a rise in the cost of inputs which will further lead to rise in the prices of the final goods and ultimately leading to increase in inflation of the Australian economy.

The costs of international trade would also rise due to the outbreak of this disease. This pandemic is leading to lack of confidence in population of the economy. They are becoming more cautious while going out and spending the money (McKibbin & Fernando, 2020). It is expected that there will be a reduction in the private spending and a rise the saving rate in the economy. Thus, it is expected that the GDP, which is a measure of nation's economic health will fall by a great amount.

From the above diagram, we can see the immediate effect of the corona virus pandemic on the economy of Australia. The downward sloping curve is the aggregate demand curve and the upward sloping curve shows the aggregate supply curve. The point E1 shows the intersection of aggregate demand curve AD1 and aggregate supply curve AS1. This is the equilibrium shown before the outbreak of the corona virus disease. The equilibrium price and quantity before the pandemic was P1 and Q1. As the economic impacts of the disease were felt, there was a shortage in the supply of goods. This shortage was due to the shut down in the industries and factories due to prevent the spread of the corona virus disease (Romano, 2020). Thus, the aggregate supply curve AS1 shifts to the left to AS2. At the price P1, there is a shortage created as the quantity demanded is more than the quantity supplied. This led to a push in the prices and the prices rise to P2. The quantity demanded and supplied also fell to Q2 from Q1. The new equilibrium point is at E2. Therefore, the corona virus pandemic led to the fall in the quantity and increase in the prices. This would further cause a rise in the inflation rate of the Australian economy. As many industries for the purpose to cut their cost are laying off employees, which is further leading to increase in the unemployment rate in the economy.

The above diagram shows the gradual consequences of corona virus on the economy. The downward sloping curve is the aggregate demand curve and the upward sloping curve shows the aggregate supply curve (Higgins-Desbiolles, 2020). As the pandemic spread rapidly and it continued for months, this led to lower confidence in the population of Australia. The people started thinking while purchasing and only bought necessities. This further led to fall in the aggregate demand of the economy. The aggregate demand curve AD1 shifts from AD1 to AD2. The equilibrium in the economy is determined by the intersection of AD2 and AS2 at point E3. The fall in the aggregate supply is more than the fall in the aggregate demand. Thus, the price P3 is still higher than price P1. The quantity demanded fell from Q1 to Q3. Thus, the impact of the corona virus disease adversely affected the economic growth of Australia and inflation in the economy.

It is expected that Australia, which is relatively higher service sector will suffer more from this corona virus pandemic. This is because the country is highly dependent on the other countries for consumption goods. It is also dependent on exports which are inputs to the production of consumption goods (Barua, 2020). With the spread of this disease worldwide, the Australian economy will not be able to import consumption goods and at the same time will not be in the position to produce these goods domestically.

It is also anticipated that the effect of this pandemic on the government budget will be huge. To pump liquidity in the economy, the government will increase its expenditure which would further lead to fall in the cash balance of the government budget.

The above details focus on the economic cost of this disease. But the more inclusive social cost should not be ignored. The disruption in the lives of people comes before any impact is rightly felt on a community. The corona virus cases and corona-triggered deaths in Australia is rising on a daily basis.

(c) The government of Australia has announced big amounts bringing the total over Australian $189 billion as on 22 March 2020 in federal government support. It has taken various fiscal measures and financial liquidity support measures. These measures are about 10 per cent of the gross domestic product of Australia. The government along with the Reserve Bank of Australia are taking measures to increase the liquidity in the market.

The government of Australia took a comprehensive package to uplift the economy and prevent recession in the economy. In response to the outbreak of corona virus disease, the government has took steps in favour of many households and businesses. Many significant payments were provided to the pensioners and to the other securities holder. All the required steps were taken to assist the relatively poor population of Australia. Various income support payments and other kinds of payments by the government of Australia would lead to rise in the consumption spending by the people of the economy by building confidence in them.

For the businesses too, the government of Australia took major steps. It is providing financial aid to the small and medium sized businesses to increase their liquidity. Since the businesses cannot operate with low level of cash flows, it was mandatory for the government to provide them financial help to continue their business. To increase the confidence of businesses, the government was providing liquidity for the employers as well as short-term assistance to the financially distressed businesses. This led to retaining of staffs by the employers and continuing their operations. Since credit on time is most significant for any of the business to deal with the crisis. Thus, the government together with other regulatory bodies took necessary measures to ensure the flow of money in the market. Moreover, the government is also giving 50 per cent guarantee to the small and medium sized enterprises’ lenders to provide the small and medium sized enterprises with short term unsecured loans. This will motivate the lenders to give credit to the small and medium sized enterprises.

Other important steps by the government of Australia also includes wage subsidy. For most of the affected regions and industries, targeted measures are taken by the government. 15-month investment incentive has been started by the government to assist the investors in business in economic growth (Gössling et al., 2020). This step is expected to lower the taxes paid by the businesses and support their investments. The state and territory governments have also taken various measures like payroll tax relief, payments to weaker sections of society, discount utility bills and assistance for health spending. All the steps were targeted to increase the confidence of the population and boost the demand of the market.

The above steps taken by the government are fiscal policy measures. Fiscal policy refers to the decision of taxation and expenditure by the government. These measures are aimed to increase the aggregate demand of the economy.

The above diagram shows the aggregate demand curve and aggregate supply curve. The downward sloping curve is the aggregate demand curve D1 and the upward sloping curve is the aggregate supply curve S1. The equilibrium in the economy is at point E1. At this point, the equilibrium price is P1 and the equilibrium quantity is Q1. The fiscal policy measures taken by the government will lead to rise in the confidence if population and hence increase in the aggregate demand. The aggregate demand curve will shift from D1 to D2. At price P1, the quantity demanded will be more than quantity supplied. This will create pressure on the price and the price will increase from P1 to P2. The equilibrium quantity will also increase from Q1 to Q2. Thus, the fiscal policy measures by the government will lead to increase in the output of the economy with an increase in the inflation rate. Since, the demand has increased, to meet the demand of population, supply by the businesses will be increased. This will further lead to employing more workers to increase the production. Hence, the employment will rise and unemployment rate will fall.

A comprehensive package is also taken by the Reserve Bank of Australia. The interest rate is reduced by 50 basis points to a low level to 25 basis points. This was to lower the cost of loans and motivating the businesses and investors to take cheaper credit. Target on government bonds were also set by the central bank and its yield was also set to 0.25 per cent. Term funding facilities were given to the commercial banks to make the credit cheaper. These all steps taken by the Reserve Bank of Australia was to increase the money supply in the economy and pump liquidity in the economy.

The Reserve Bank of Australia through its open market operations has also provided liquidity to the financial system of the economy. This step is taken for the smooth functioning of the capital markets in Australia. To avoid the temporary shortages in the economy, the Reserve Bank of Australia is supplying ample amount of bank notes to meet the demand of bank notes.

The above measures taken by the Reserve Bank of Australia . Monetary policy refers to the control of money supply by the central bank. These measures will also lead to increase in the money supply and hence liquidity in the economy.

Both the fiscal and monetary policy measures should be taken simultaneously by the government and Reserve Bank of Australia to ensure increase in output and employment.

References for Gross Domestic Product of Australia

Barua, S. (2020). Understanding Coronanomics: The economic implications of the coronavirus (COVID-19) pandemic. SSRN Electronic Journal https://doi org/10/ggq92n.

Gössling, S., Scott, D., & Hall, C. M. (2020). Pandemics, tourism and global change: a rapid assessment of COVID-19. Journal of Sustainable Tourism, 1-20.

Hall, C. M., Scott, D., & Gössling, S. (2020). Pandemics, transformations and tourism: be careful what you wish for. Tourism Geographies, 1-22.

Higgins-Desbiolles, F. (2020). Socialising tourism for social and ecological justice after COVID-19. Tourism Geographies, 1-14.

McKibbin, W. J., & Fernando, R. (2020). The global macroeconomic impacts of COVID-19: Seven scenarios.

Romano, F. (2020). An Estimate of the Economic Impact of COVID-19 on Australia. Available at SSRN 3581382.

Smith, J. A., & Judd, J. (2020). COVID‐19: Vulnerability and the power of privilege in a pandemic. Health Promotion Journal of Australia, 31(2), 158.

Weible, C. M., Nohrstedt, D., Cairney, P., Carter, D. P., Crow, D. A., Durnová, A. P., ... & Stone, D. (2020). COVID-19 and the policy sciences: initial reactions and perspectives. Policy sciences, 1-17.

Wenham, C., Smith, J., & Morgan, R. (2020). COVID-19: the gendered impacts of the outbreak. The Lancet, 395(10227), 846-848.

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