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Decrease In Short Run Aggregate Supply Economics Essay

It’s official – the greater Christchurch economy has shrunk by about 10 per cent because of the three big earthquakes.

That’s about $1.5 billion less of goods and services produced in the months from September 2010 to June 2011.

That is from the Central City Development Unit, a division of Cera (Canterbury Earthquake Recovery Authority), which comments on its website on the impact of the CBD blueprint on the local economy.

CCDU says: “Regional estimates about the impact of the earthquakes are subject to a degree of error, but it appears that the September earthquake decreased output by about 2.5 per cent-3 per cent.

“The February earthquake shrank the economy by 6 per cent – which is equivalent to the economic impact from severe recession.

“The combined total impact over the September 2010-June 2011 period was a decline in output of about 8 per cent to 11 per cent.”

Treasury has estimated that the earthquakes dragged down national GDP by 1.5 per cent.

Greater Christchurch is now growing more quickly than the national economy, CCDU says.

But it is still 4 per cent below where it was in September 2010.

The local economy began growing about nine months after the February earthquake.

“It will take some time to get the economy back to where it was before September 2010, but it is growing quickly – between 1 per cent-3 per cent every 3 months.”

A spokesman for Cera said it compiled data from sources such as Treasury, NZIER, Infometrics and the National Bank for its purposes.

Cera was in the process of pulling together economic indicators from a variety of sources which can be published on a more regular basis, the spokesman said.

Economy knocked back about 10pc by quakes

Recently Christchurch faced three major Earth Quakes, resulted in a major economic impact. The “September earthquake decreased the output by 2.5% to 3%”. However the “February earthquake squeezed and shrunk the economy by 6%”, resulting in decline in the national GDP by 1.5%. The overall impact decreased the output by about 8% to 11%, and reduced the economy by 10% and made a loss of $1.5 billion of goods and services. All the values are taken from the article.

Figure 1. Decrease in short-run aggregate supply (SRAS)

The theory says that the “factors that cause changes in cost of production” are the reasons for decrease in SRAS [2] . However in Christchurch the AS decreased due to natural hazards. The impact of the earthquakes affected the output, could be due to break down of the production units or it can be a change in cost of production as in the accessibility of raw materials might have become difficult or there could be an decrease in the labour quantity. The SRAS decreases on the figure 1 due to all the reasons mentioned above.

Figure 2. Impact on SRAS and long run aggregate by Shift in aggregate demand (new classical perspective)

Figure 2 explains the effect of the earthquake in Christchurch in short term and long term. The AD will decrease (from AD1 to AD2) as the consumption may have reduced for that short period and even the investment may have reduced. This will result in lower real output (Yf to Y1) as it cannot manage to produce at full capacity (Yf); the average price level may also reduce (from P1 to P2). There will be a deflationary gap as the output is within the full capacity. As the price and output have decreased the production can also be reduced, and so the SRAS will also shift downwards (SRAS1 to SRAS2). So this ends up at the LRAS (full output level) but with a lower average price [3] .

So as shown in figure 2 that the output reaches the full employment in the long run, it causes some problems to employees and the workers. When the AD moves inwards in figure 2 there are chances of people getting unemployed. This type of unemployment could be called as cyclic unemployment, where people are unemployed due to the businesses are failing to survive, like in this case, due to earthquake demand for many product have reduced.

Figure 3. Cyclic unemployment [4]

This unemployment is a result of decrease in AD. The wage rate is also likely to go down to W1 from W. however due to earthquake some production unit might have demolished which could have been a reason for unemployment or in that situation the demand of luxury goods might have reduced and so again the unemployment rate might have increased.

The unemployment level can be recovered by announcing the demand side policies, which may increase the AD. Banks can introduce monetary policy by reducing interest rates which might increase the investments or government can bring fiscal policy by reducing income tax which will encourage more people to look for a job.

When the unemployment rate is high in a country they may face many problems like high crime rate or vandalism which could affect the society. However the unemployed person, themselves may face mental illnesses as they won’t have anything to do and also the government will have to give up their opportunity cost because of unemployment benefits.

These overall activities affect the GDP of the country. Christchurch may produce less and due to the recent hazard they may be producing within the production possibility frontier (PPF) – it “shows the maximum combinations of goods and services that can be produced by an economy in a given time period” [5] . This shows that they may be wasting the scarce resources and not utilizing it to its full capacity.

As it’s a natural hazard that created the decline in GDP, no precaution could have been placed. However in long term it is like for economy to grow at a faster rate and the unemployment level may also reduce. The unemployment created by the natural hazards won’t really come under and type of unemployment but is very close to cyclic unemployment.



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