Question 4: The short-run economic fluctuation

a. Analyzing the article on the shortage economy

 Different forces lead to the shortage economy

According to the article, there are four main forces that result in the shortage of economy which
are COVID-19, Decarbonization, Protectionism, and Economic Nationalism.

COVID-19 leads to an economic crisis in 2020-2021, resulting in the implementation of $10.4

trillion to stimulate the global economy. Therefore, the economy recorded an enormous
recovery but was unstable. As a result of recuperation, the demand for goods and services is
increased. However, supply chains have lacked investment, and the unemployment rate
climbed up, leading to a shortage in supply. Moreover, as a result of Protectionism,
governments show less focus on economic efficiency, since they mainly focus on punishing
geopolitical. This decision leads to higher taxes in the country, resulting in a lack of supplies.
Related to the energy problem, it can be witnessed from the article, the supply of fossil and coal
industries had a lack of investment sources and workforce, leading to the shortage of exploit
and manufacture energy.

To sum up, all the forces result in the higher demand of using goods and services, while
creating a shortage in the supply.

 Explain the effects on SRAS and AD curves with AS/AD diagram

Diagram 1: The impact of different forces that lead to the shortage economy on the Aggregate Demand
curve
The article recorded the appearance of three effects (the wealth effect, the interest rate effect,
and the international trade effect), explaining a downward sloping aggregate demand curve
(AD). As mentioned above, the demand for using goods and services increased after the $10.4
trillion of global stimulus. Moreover, the shortage of supply created a higher price for goods and
services. Hence, we can see an outward shift of the AD, and a move of equilibrium to a higher
price level as well as higher output quantity (Diagram 1).

Diagram 2: The impact of different forces that lead to the shortage economy on the Short-run Aggregate
Supply curve

Analyzing the article, we can recognize an upward-sloping short-run aggregate supply since the
price level is increased, which follows the new classical misperception theory. As a result of
COVID-19, the SRAS curve marked a shift to the left since goods and services’ prices
simultaneously climbed up.

b. Discussion about Australia and India’s shortage issue

Table 1: The components of AD over the last 5 years of Australia and India (2016-2020). Source: The
World Bank & Trading Economics

For a developing country like India, the most essential thing is to develop the country's economy
sustainably over time. These statistics show that the Indian government has done a great job to
achieve its goals. It can be witnessed that the data on Consumption, Investment, Government
purchase, and Net exports all have positive upward signals, proving that people's demand for
goods and services is increasing. This is different from Australia where the Australian statistics
show a balance between these data, especially the Consumption rate decreases over the year,
but the Net exports rate increases to compensate. It proves that the Australian government has
had smart policies to maintain the country's economy. In summary, on the AD/AS diagram,
Australia's AD curve will have a slight outward shift, while India will have a more obvious
outward shift.

Table 2: GDP Annual Growth Rate and the Unemployment rate of Australia and India (2020-2021).
Source: Trading Economics

According to statistics and analysis, it can be drawn that Australia and India both have
shortages economy as mentioned in the article, especially COVID-19. According to World Bank
statistics, when the COVID pandemic was raging, Australia's % of GDP growth decreased by
only 0.28%, while India decreased by approximately 8%. We can see the advantage of
countries with sustainable economies like Australia when its indexes are not affected too much.
In contrast to an economy with an unstable economy like India, COVID-19 had brought a
disaster to this country when the import and export indexes dropped suddenly. In addition, India
also has economic nationalism problems when the country has a coal shortage. According to
International Energy Agency, India is the third-largest coal export in the world, but because of
the shortage of fuel materials, this industry is stagnant. However, we see a strong recovery in
GDP growth as India's index surges to 8.4% in 2021. Besides, India controlled the country's
unemployment rate quite well compared to Australia before the COVID pandemic spread
globally in 2020. Then when COVID was controlled globally, India also gradually improved the
unemployment rate in 2021 when this figure is only 4.3%, while in Australia, this figure is still
5.25%. From this, it can be inferred that the shortage economy affects the SRAS curves of
these two countries and will cause the SRAS curve to move to the right.

In conclusion, Australia and India both struggle with a shortage economy as described in the
article. However, as a developed country, Australia showed less impact on the issue on SRAS
and AD curve, while this issue affected India ‘s economy SRAS and AD heavily.
The World Bank n.d, ‘Exports of goods and services (current US$) - Australia, India’, statistics,
viewed 8 December 2021.
https://data.worldbank.org/indicator/NE.EXP.GNFS.CD?end=2020&locations=AU-
IN&start=2016

The World Bank n.d, ‘Imports of goods and services (current US$) - Australia, India’, statistics,
viewed 8 December 2021.
https://data.worldbank.org/indicator/NE.IMP.GNFS.CD?end=2020&locations=AU-IN&start=2016

The World Bank n.d, ‘Final consumption expenditure (% of GDP) - Australia, India’, statistics,
viewed 8 December 2021.
https://data.worldbank.org/indicator/NE.CON.TOTL.ZS?end=2020&locations=AU-IN&start=2016

The World Bank n.d, ‘General government final consumption expenditure (constant LCU) -
Australia, India’, statistics, viewed 8 December 2021.
https://data.worldbank.org/indicator/NE.CON.GOVT.KN?end=2020&locations=AU-
IN&start=2016

Trading Economics n.d, ‘Australia Government Spending to GDP’, statistics, viewed 7

December 2021
https://tradingeconomics.com/australia/government-spending-to-gdp

Trading Economics n.d, ‘India Central Government Total Expenditure to GDP’, statistics, viewed
7 December 2021.
https://tradingeconomics.com/india/government-spending-to-gdp

Munawar, H. S., Khan, S. I., Ullah, F., Kouzani, A. Z., Parvez Mahmud, M. A., ‘Effects of
COVID-19 on the Australian Economy: Insights into the Mobility and Unemployment Rates in
Education and Tourism Sectors’, journals, Vol. 13, Iss. 20, viewed 7 December 2021.
https://www.mdpi.com/2071-1050/13/20/11300

ProQuest 2021, ‘The shortage economy’, the economist, viewed 6 December 2021.
https://www.proquest.com/docview/2580351382/fulltext/961415597A704315PQ/1?
accountid=13552

The World Bank n.d, ‘GDP growth (annual %) - Australia-India’, statistics, viewed 8 December
2021.
https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?end=2020&locations=AU-
IN&start=2015

International Energy Agency n.d, ‘Coal in the Energy Supply in India’, Coal industry advisory
board, viewed 9 December 2021.
https://iea.blob.core.windows.net/assets/8a7761ee-4305-42d5-ad5b-2471c4228772/
CoalintheEnergySupplyofIndia.pdf