Australia's Major Terms of Trade and Commodity Shocks, 1800-2013: Sources and Impacts

Commodities have been central to structural change in the Australian economy with the 2000s expansion of mining seen as raising the spectre of the Dutch disease. If the assumption in the standard Heckscher-Olin trade model that labour and capital are not mobile between countries is relaxed, it is observed that the commodities boom which under-pinned Australia's rapid expansion in the period 1800-90 drew in significant amounts of labour and capital. In lifting the absolute size of the economy, it proved to be a positive for manufacturing and other sectors of the economy. The period 1890-1965 was a slow growth phase for commodities with a structural shift towards other sectors, even if it meant Australia shifted from leading to lagging in growth in GDP per capita. Both these two phases highlight the capacity of the economy to make significant structural adjustment, downplaying the perceived threat of the Dutch disease. The second commodities expansion phase commenced in the mid-1960s, with the two booms in the 1960s and the 2000s. This phase has caused significant structural change, with manufacturing retreating with a particularly marked decline in the 2000s. Contrary to perceived wisdom, commodity and terms of trade booms have rarely gone in tandem and the 2000s commodities boom stands in contrast with previous booms for its association with a sustained rise in the terms of trade.