Question

Using the dynamic AD/AS model, explain why Kennedy is concerned about the state of the global economy. What difference might it make to the Australian economy if the trading relationship between China and Australia deteriorates as political tensions continue to increase?

Answer 1

Part 1) Kennedy on State of US Economy and the Aggregated Demand and Supply Model: -

The global economy is going through a state of deep recession which has been caused, primarily because of the fact that the COVID 19 Pandemic has resulted in unprecedented deaths, and people remain sceptical about moving out of their houses.

As a result of this the United States and numerous other countries, imposed restrictions on people of moving out of their houses to contain the deaths as far as technically possible. The Healthcare sector they believed was not adequately equipped with dealing with the situation at hand.

To stop the same, the US economy shut down itself and people were told to stay confined to their homes. The end result of this is that the aggregate or total demand for goods and services in the economy of the United States fell down sharply.

Kennedy in his explanation said, that the Aggregate demand for goods and services has fallen sharply over the last few quarters and the government must try and deal with the situation in alternative measures such as protecting those that may have other diseases or elderly who were at higher risk but to open up the economy as it would lead to a global catastrophe if it went unchecked.

The following is a graphical representation of the state of the economy which has been explained by Kennedy: -

In the above graph, we see that the aggregate demand for goods and services has declined from Initial Aggregate Demand to Reduced Aggregate Demand. The Gross Domestic Product which is the sum total of the value of final goods and services produced in a country has also declined. This has led to the prices of goods and services falling and the equilibrium which is the point where demand and supply meet has also shifted towards the left leading to lesser overall quantity.

This points out to the fact, that the country in a state of extreme economic slowdown, and Kennedy believes that the only way of coming out of the same is allowing for the economy to open even if the cases rise for some time. Provide economic support to those who cannot come out of their houses example old people or others with co-morbidities.

During the current time, the economic slowdown has resulted in low consumption, spending and income for workers as a result has fallen since producers are making losses, and would want to cut the same by firing people. He believes that opening up of the economy would allow for reversal of the above explained economic recession.

Part 2)

Australia recently has imposed serious tariffs on Chinese imports into the country, as it believes that the country has been over exporting to Australia and they believe that a case of antidumping is made out in this case.

Australia believes that local manufacturers for various products such as plasticware, aluminium, steel etc are all being damaged because of the fact that Chinese imports into the country come for a fraction of the cost and are so because the country produces low quality products in a very high volume for international demand.

If the current crisis continues, with heavy tariffs and taxes, the import industry in Australia would surely collapse. This is because trade partners will be left with negligible profits to be made and with business shrinking would have no choice but to close down their business.

Now, for some industries which were facing competition from China as described above, the conditions may improve, however considering the fact that China may also impose retrospective taxation on Australian products points out to the fact that this conflict may have a far-reaching impact on Australian exports as well.

Thus, we can conclude by saying that two effects of the current trade war with China is that importers from China would face a big impact and some critical ones may also run out of business. Similarly, in the long run when China imposes trade restrictions on Australian products, they would also face serious decline in profits as well as profit volumes and therefore sales both would decline.

Please feel free to ask your doubts in the comments section.