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Economic Commentary 1 Section 3: Macroeconomics - Essay Example

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In the face of the global financial crisis which swept over almost all nations around the world, especially those which are industrialized, the Australian government proved itself to be one of the most resilient and flexible of the lot. Instead of injecting a huge money flow…
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Economic Commentary 1 Section 3: Macroeconomics
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Economic Commentary 1 Section 3: Macroeconomics

A low GDP, or rather a GDP below the potential full employment of a nation, might not be suggested in normal times as far as the views of the Keynesian school of thought, since that would mean curbing down the economic growth potential of the nation as well. However, since the economy was confronting a terrible financial crisis, unknown within the world’s 70 years history, the situation was indeed a delicate one and needed to be handled with a great degree of perseverance.
People already had lost their faith in the monetary system of the nation and thus the demand for liquid money was already high. In such a situation, if the government had been lenient enough and allowed the GDP to rise, there would have been an excess demand for commodities, which would have resulted to inflation. In a fragile situation as the one prevailing, inflation would have worsened the circumstances. But, as Okun’s Law describes it, a lower level of inflation is always accompanied by a rise in the rate of unemployment in the economy and vice-versa. This is because a lower inflation would mean a lower price level prevailing in the economy. Now a low price level would mean lower profits for the producers and thus they would prefer to wait until the prices reach a feasible level, before they start further supply. But when production is low, there is no reason why the employers should keep on supporting idle workers and thus they start retrenching them, leading to a rise in the level of unemployment.
However, a low inflation would mean a rise in the value of the national currency implying a rise in the value of the indigenous goods in terms of the foreign currency. This would again indicate that the value of exports rise compared to that of imports, since goods meant for exports are produced in the domestic economy while those supposed to be imported are produced in the foreign lands. Hence, the terms of trade for the concerned country are bound to rise, where ... Read More
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