Discuss About The Stability Palgrave Dictionary Of Economics?
The term equilibrium, in economic context, is defined to be the condition where the demand and the supply forces interact with each other and reach to a mutually agreed balanced situation, from where neither the demand forces nor the supply forces have any incentive to deviate from, provided there is no external influence from any exogenous conditions. The demand and the supply forces are the backbone of the market dynamics and all the activities in the market are subjected to the mutual interactions of these two forces (Ekelund Jr & Hébert, 2013). The equilibrium, as defined above, is said to be a stable equilibrium, if in case of any deviation from the equilibrium condition due to influence of exogenous forces, the economy again comes back to its original equilibrium situation in due course of time. The report takes into account this concept of stability of equilibrium, both in terms of microeconomic and macroeconomic perspectives. In this context, the report tries to analyze the current stability scenario in the economy of Australia, with respect to economic indicators like GDP, price levels and others (Baumol & Blinder, 2015).
In the market economy, the consumer and the producer behaviors are determined by the demand and the supply side dynamics respectively. The dynamics in the market can be shown as follows:
Figure 1: Microeconomic Stability in equilibrium
(Source: As created by the author)
The above figure shows the dynamics of the demand and the supply curve. As can be seen from the diagram, the equilibrium occurs at the point where the supply curve and the supply curve touches each other; point E in this case. The equilibrium price is at point P0 and the equilibrium quantity demanded and the equilibrium quantity supplied both being Q0. The stability of the equilibrium, can be seen with the help of the following phenomenon (Fisher, 2016).
In the above diagram, when due to some reasons, the price increases from the equilibrium price P0 to P1, then the demand for the commodity decreases significantly. This fall in demand may be a cumulative effect of two events. Due to an increase in the level of price, firstly, the existing buyers of the same commodity buy less than the previous amount. Secondly, the marginal buyers, in the initial condition, now completely moves out of the market as the commodity now becomes unaffordable to them (Boland, 2014). Together these two effects decrease the overall demand in the market. However, due to an increase in the price, the market becomes more attractive to the sellers, more and more sellers try to enter the market, and the existing sellers increase their production, thereby increasing the supply in the market. Together this leads to an excess supply in the economy, which in its turn creates a downward pressure on the price levels as the sellers are required to lower their price levels. Thus, the price level comes back to its initial equilibrium point P0 (MacDonald & Stein, 2012).
Again, if the reverse scenario takes place and the price decrease from the equilibrium level P0 to P2, then the supply decreases, as due to loss of profitability in the market, many sellers move out of the market. On the other hand, the decrease in the price increases the demand for the same commodity, by the law of demand. This in turn creates an excess demand in the market, leading to an upward pressure on the price levels such that the price again comes back to its equilibrium level P0.
Thus, it can be seen that no matter however the price level changes from the equilibrium situation, the demand and the supply forces interact with each other to bring it back to its initial equilibrium situation, thereby indicating that the concerned equilibrium is a stable one (Henderson, 2014).
The above scenario is based on the microeconomic perspective as it deals with the dynamic stability of the equilibrium in one particular market. The same concept, however, is applicable in the macroeconomic perspective too:
Figure 2: Macroeconomic stability in equilibrium
(Source: As created by the author)
In the macroeconomic perspective, the equilibrium is determined on the basis of the aggregate demand and the aggregate supply in the economy as a whole and in case of any deviations from the equilibrium situation, these two forces mutually interact with each other to bring the economy back to its original equilibrium situation (Rader, 2014).
The Australian economy has been one of the significantly dominating players in the global economic scenario and is considered to be one of the most successful ones too. The economy type of this country is mainly market based and capitalistic in nature. The government and the centralized planning does not play much role in economic decisions and activities in this market economy and the government mainly plays the role of a supervisor and not that of a controller. Much of the market decisions are dependent on the activities of the demand side and the supply side players in the economy. The objective of this economy is to maximize the profit of the providers and also to increase the satisfaction of the consumers, thereby increasing the overall welfare of the society as a whole.
The economic stability of any country can be portrayed by the GDP and the GDP dynamics of the country. The Gross Domestic Product of a country is the value of the sum of all the goods and services that are produced within the geographical boundary of the country within a particular period, generally one economic year. The growth rate of GDP and the growth pattern tells a lot about the welfare and the economic stability of the country.
Figure 3: Australia GDP over the years (2006-2016)
(Source: Tradingeconomics.com, 2017)
The above diagram shows that the growth in the Gross Domestic Product of the economy of Australia, has been stable in the last few years. As the trend shows, there exists a non-dramatic upward pattern in the growth rate of the economy. The GDP of the country has increased from USD 853.76 billion in 2006 to USD 1567.18 billion by 2013. However, the growth reduced a little and came down to 1204.62 USD billion by the end of the year 2016. However, both the increase and decrease do not show any dramatic fluctuations (Dyster & Meredith, 2012).
Figure 4: Rate of Inflation in Australian Economy
(Source: Tradingeconomics.com, 2017)
The overall level of price and the fluctuations in the inflation rate in the country has also been more or less stable, with the fluctuations being moderate and the economy maintaining a more or less stable situation in this aspect. This implies that the overall economy is in a steady state equilibrium, where even if some irregularities occur, they are not of drastic nature and are taken care of eventually. This in turn implies that the overall standard of living and the consumer price index of the country maintains a more or less stable pattern.
The economy of Australia has an inherent stability mechanism, which consists of primarily two types of stabilizers:
These type of stabilizers are used in case of economic fluctuations of bigger magnitudes like recessions or depression. These include changes in the budget of the government as a whole, by changing the existing taxes, modifying them and introducing new budgetary mechanisms (Manalo, Perera & Rees, 2014).
This kind of stabilizing instruments operates in a counter cyclical mechanism, which does not directly change the budgetary structures but indirectly affects the budget and the aggregate demand of the economy. These instruments include GST and CGT and the company taxes. These measures are in general used by the governing authority of the country in case of small and manageable fluctuations.
The effectiveness of this policy framework can be seen from the country’s past experience in dealing with the Great Recession of 2007-2008. This phenomenon, which originated in the USA and affected more or less all the economies of the world, comparatively left the economy of Australia relatively unaffected. The inherent stabilizing system of the economy helped immensely in getting out of this huge global adverse economic phenomenon without increasing the burden of suffering of the residents by that amount (Bagliano & Morana, 2012). The stabilizing framework included the robust banking sector of the economy, which worked efficiently in keeping the interest rates and the lending potentials floating. Other factors contributing in ensuring stability includes the strong and beneficial trade relations of the country with the other economic giants like China and Japan, other than the USA, which again indicates that the country has also gained stability in the external sector.
Conclusion:
The above discussion elaborates the concept of equilibrium and stability in the equilibrium. In this context, it can be seen from the above discussion that the economy of Australia has maintained a more or less stable pattern with respect to the different economic indicators. Much of this stability can be attributed to the robust stabilizing policy mechanisms which the country enjoys and which has proved to be efficient till now in bringing back the economy to stability in case of any fluctuations.
References
Australia GDP | 1960-2017 | Data | Chart | Calendar | Forecast | News. (2017). Tradingeconomics.com. Retrieved 22 September 2017, from https://tradingeconomics.com/australia/gdp
Bagliano, F. C., & Morana, C. (2012). The Great Recession: US dynamics and spillovers to the world economy. Journal of Banking & Finance, 36(1), 1-13.
Baumol, W. J., & Blinder, A. S. (2015). Microeconomics: Principles and policy. Cengage Learning.
Boland, L. A. (2014). Methodology for a New Microeconomics (Routledge Revivals): The Critical Foundations. Routledge.
Dyster, B., & Meredith, D. (2012). Australia in the global economy: Continuity and change. Cambridge University Press.
Ekelund Jr, R. B., & Hébert, R. F. (2013). A history of economic theory and method. Waveland Press.
Fisher, F. M. (2016). Adjustment processes and stability. The new palgrave dictionary of economics, 1-6.
Henderson, J. V. (2014). Economic theory and the cities. Academic Press.
MacDonald, R., & Stein, J. L. (Eds.). (2012). Equilibrium exchange rates (Vol. 69). Springer Science & Business Media.
Manalo, J., Perera, D., & Rees, D. (2014). Abstract for RDP2014-11: Exchange Rate Movements and the Australian Economy.
Rader, T. (2014). Theory of microeconomics. Academic Press.
Tradingeconomics.com. (2017). Australia Inflation Rate | 1951-2017 | Data | Chart | Calendar | Forecast. Tradingeconomics.com. Retrieved 21 September 2017, from https://tradingeconomics.com/australia/inflation-cpi
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