AWA: Academic Writing at Auckland

Feburary 22, 2011, is a nightmare of many New Zealanders, especially for those who live in Christchurch. The magnitude 6.3 earthquake has not only devoured the city but also hit the economy of the entire New Zealand. In this essay, the likely impact of the earthquake on the macroeconomics in New Zealand will be examined. It will discuss the immediate issues that the earthquake created and also the economic impacts over time. Changes in the Gross Domestic Product, interest rate, inflation rate and unemployment level will be discussed in turn. The government’s fiscal policy and monetary policy against the earthquake will be examined at last. It is deemed that the earthquake is creating a negative impact on the economy this year but it will get better as time go on.

The earthquake has an immediate effect on New Zealand’s Gross Domestic Product (GDP), but the GDP is anticipated to increase in the future. GDP measures the total amount of final goods and services that a country produced over a given period of time. The earthquake caused catastrophic damages to residential housing, commercial buildings and infrastructure, which were estimated to cost NZ$15 to 20 billion (“Banks slash mortgage”, 2011). Some firms were decimated during the earthquake and thus, their production was stopped. As no output could be produced and natural resources were destroyed, the engine of GDP growth of whole New Zealand has slowed down simultaneously. Therefore, the Treasury expected the GDP growth in 2011 will fall by 1.5 per cent (Treasury, 2011). However, GDP would increase over time when massive reconstruction is carried out. Investments and government spending will increase because numerous infrastructure, houses and business buildings have to be rebuilt in Christchurch. These activities will boost the amount of capital stocks available in the economy. The constructions and firm reinvestments will enable businesses to get back and produce in Christchurch. The destroyed firms may also relocate their office to nearby towns such as Ashburton to resume production (Adams, 2011). These investments in factors of production can raise the productivity, which will turn out a higher output and fuel the engine of GDP growth in later years. Therefore, economy is anticipated to grow from next year.

Unfortunately, GDP fails to reflect the change in people’s living quality in Christchurch. The earthquake spoiled its landscapes, heritages, landmark buildings and more importantly the homestead of people. Also, heavy reconstruction is associated with noise pollution, air pollution and traffic congestion. All the destructions above and the fear after the shock will result in a decrease in happiness of people living in Christchurch, as well as their quality of living.

At the same time, interest rates would be incidentally pushed up by the reconstruction and investments in the city. After the earthquake, firms in Christchurch need to be financed in order to restore their businesses. ASB announced that it has prepared to provide 50 million loan for local businesses for recovery and rebuild program (“Bank announces Christchurch”, 2011). This reflects many local businesses in Christchurch are looking for borrowings. This increases the demand for loanable funds from D1 to D2 as shown in Diagram 1 below. However, the increase in demand is likely to be less than the damage as time is needed for business confidence to be developed. Some firms that were tumbled down in the earthquake are not going to invest again. With the rise in demand for loanable funds, the equilibrium interest rate will increase from r1 to r2 as shown in Diagram 1. In virtue of a higher interest rate, people are more willing to save. And, the quantity supplied and the equilibrium quantity of loanable funds will increase from Q1 to Q2. Therefore, without government intervention, the earthquake will lead to a rise in interest rate and an increase in equilibrium quantity of loanable funds.

On the other hand, people cost of living would climb up as a result of the earthquake and government reconstruction. According to the quantity theory of money, the total amount of money in an economy will eventually be used to buy all goods and services that are available in the economy (Bandyopadhyay, Mankiw & Wooding, 2009). Price can be calculated as total money divided by total goods and services. As seen in many pictures and videos, there were landslides and flooding which inevitably led to loss of inventory in various kinds of shops. Some life-sustaining resources like food, water and housing would also become scarcer after earthquakes (Brancati, 2007). Destroyed farms and death of poultry would result in shortage of food, while contamination of water would cause scarcity of water. As a result, people would have less variety of goods to choose from and to buy, with the same amount of money. Losses of goods cause a drop in purchasing power of money in the economy, assuming the amount of money in the economy is the same. At the same time, more money is put on reconstruction. This will cause a flood of money while the amount of materials and labours for construction are remaining the same, hence pushing up the price level. Apparently, all the above are going to reduce the purchasing power of money for New Zealanders; the inflation pressure will increase. Therefore, it is not surprised that the Treasury estimated that inflation rate will soar to 4.5 per cent in the year to March, and reaching 5 per cent in the year to June (Knowsley & Weekes, 2011).

Undoubtedly, a boost in unemployment rate will be seen shortly but presumably a slow fall in unemployment will follow. The number of unemployed people is determined by the demand and supply in the labour market. It is clear that a significant number of commercial buildings were knocked down by the earthquake and many of them have to be closed. This will directly decrease the demand for labour. As indicated in the diagram 2, demand curve decreases from D1 to D2. As minimum wage is enforced in New Zealand, the quantity demanded and quantity transacted of labour decrease from Q1 to Q2 in diagram 2, while the quantity supplied of labour remains at Qs. In view of this, a considerable amount of people will lose their job. The unemployment will increase from “a” to “b”, as indicated in diagram 2. Higher unemployment is foreseen to be locals rather than newly immigrants. Immigrants are likely to move out of the city to find job opportunities. Unlike immigrants, locals have their families and homes in Christchurch so they are less mobile.

However, as time passes, firms will be rebuilt and reconstruction will be carried out in full speed. The demand for labour will ascend by then. This will reduce the unemployment rate, especially among the male market because of the tremendous demand on construction workers. Hence, banks believe the earthquake would cause the unemployment rate to uplift from 6.8 per cent to 7 per cent and predict the rate will fall to 6.2 per cent next year (Fallow, 2011a; “Kiwi recovers from”, 2011).

In response to the impacts of the earthquake, the government has carried out a budget deficit. The budget deficit is expected to go up to 9 per cent of the GDP in the year 2011 (Fallow, 2011b). More money will be spent on rebuilding the shocked city. A budget deficit implies a drop in public savings and decreases the supply in loanable funds from S1 to S2 as shown in diagram 3. These will further increase the interest rate from r2 to r3, on top of the increase that was discussed earlier in this essay. The overall change in the equilibrium quantity of loanable funds is ambiguous. Moreover, new money that bumps into the economy will add pressure on inflation because more money is added on limited materials.

Regarding the increase in interest rate, the government has introduced a monetary policy in order to mitigate the impact. The government announced to reduce the official cash rate (OCR) by 0.5 per cent and the banks followed to reduce their mortgage rates (“Bank slash mortgage”, 2011). This makes investment in Christchurch become more affordable and stimulates both firms and households to reinvest. However, the result will be limited by the increase in real interest rate mentioned earlier in the essay. In addition, the OCR cannot directly affect the real interest rate as the real interest rate is determined by the market of loanable funds. The OCR will only influence the nominal interest rate instead of the real interest rate.

In conclusion, the Christchurch earthquake will strike our economy immediately but it is believed that the economy will be improved over time. GDP will first drop because firms stopped producing. It will increase when firms start to operate again and after the reconstruction take place, although the increase may not reflect the quality of living in the area. Interest rate will be pushed up by the rise in demand for loanable funds and the budget deficit. The government is trying to avoid this by lowering the OCR. Inflation rate and unemployment rate are likely to increase. However, the unemployment rate will lessen in the future as labours will be needed for constructions and resumed businesses. Therefore, although the earthquake hit the economy badly at present, there is still a bright side for the future.

Word count: 1547 words

Reference List

Adams, C. (2011, March 9). Ashburton may attract quake-hit firms. The New Zealand Herald. Retrieved from www.nzherald.co.nz

Bandyopadhyay, D., Mankiw, N. G., & Wooding, P. (2009). Principles of macroecomics in New Zealand (2^nd ed.). South Melbourne, Vic.: Cengage Learning.

Bank announces Christchurch rebuild package. (2011, March 10). The New Zealand Herald. Retrieved from www.nzherald.co.nz

Banks slash mortgage rates after OCR cuts. (2011, March 10). The New Zealand Herald. Retrieved from www.nzherald.co.nz

Brancati, D. (2007). Political aftershocks: The impact of earthquakes on intrastate conflict. The Journal of Conflict Resolution, 51(5), 715-744. Retrieved from http://ezproxy.auckland.ac.nz/login?url=http://proquest.umi.com.ezproxy.auckland.ac.nz/pqdweb?did=1338864691&sid=1&Fmt=3&clientId=13395&RQT=309&VName=PQD

Fallow, B. (2011a, March 11). Rate cut to offset shock of quake. The New Zealand Herald. Retrieved from www.nzherald.co.nz

Fallow, B. (2011b, March 22). Slash spending, return to surplus, urges IMF. The New Zealand Herald. Retrieved from www.nzherald.co.nz

Kiwi recovers from fast dive. (2011, March 8). The New Zealand Herald. Retrieved from www.nzherald.co.nz

Knowsley, J. (2011, March 6). Inflated to bursting point. The New Zealand Herald. Retrieved from www.nzherald.co.nz

Treasury. (2011, March 6). Monthly economic indicators February 2011. [Press Release]. Retrieved from http://www.treasury.govt.nz/economy/mei/feb11