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Implications for the Australian Economy of Strong Growth in Asia

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  • Michael Plumb

    (Reserve Bank of Australia)

  • Christopher Kent

    (Reserve Bank of Australia)

  • James Bishop

    (Reserve Bank of Australia)

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    Abstract

    Strong growth in Asia, particularly in China, has had a profound impact on the Australian economy over the past decade. Most notable so far has been the boom in the resource sector, with commodity prices and hence Australia's terms of trade rising to historically high levels over a number of years. This has been accompanied by a sizeable appreciation of the exchange rate. While the terms of trade have passed their peak, the substantial investment in productive capacity of the resource sector in recent years is expected to provide a large boost to the production and exports of resources in coming years. In this paper we describe how the pattern of structural adjustment to the positive terms of trade shock has, to date, proceeded broadly in line with that suggested by a simple theoretical model that distinguishes between three broadly defined sectors: the resource sector, the 'other tradable' sector and the non-tradable sector. In particular, relative wages and prices adjusted in a way that facilitated the reallocation of factors of production towards the resource sector. While not all parts of the economy have benefited, the process of adjustment thus far has occurred relatively smoothly in a macroeconomic sense; inflation has remained within the target range, or not too far from it, unemployment has remained relatively low and output has grown at close to trend rates. This stands in stark contrast to some earlier episodes of terms of trade booms in Australia. We argue that macroeconomic adjustment to the current terms of trade shock has been facilitated by the appreciation of the exchange rate, the anchoring of inflation expectations and labour market dynamics whereby wage pressures in industries or regions experiencing strong conditions associated with the boom in resource investment have not spilled over to parts of the economy experiencing weaker conditions.

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    Bibliographic Info

    Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp2013-03.

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    Date of creation: Mar 2013
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    Handle: RePEc:rba:rbardp:rdp2013-03

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    Related research

    Keywords: Australian macroeconomy; economic performance; terms of trade; resource boom; industry analysis;

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    References

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    1. T. W.Swan, 1960. "Economic Control In A Dependent Economy," The Economic Record, The Economic Society of Australia, vol. 36(73), pages 51-66, 03.
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    Cited by:
    1. Tim Atkin & Mark Caputo & Tim Robinson & Hao Wang, 2014. "Macroeconomic Consequences of Terms of Trade Episodes, Past and Present," CAMA Working Papers 2014-11, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    2. Sean Langcake & Tim Robinson, 2013. "An Empirical BVAR-DSGE Model of the Australian Economy," RBA Research Discussion Papers rdp2013-07, Reserve Bank of Australia.
    3. Ivanova, Galina, 2014. "The mining industry in Queensland, Australia: Some regional development issues," Resources Policy, Elsevier, vol. 39(C), pages 101-114.
    4. Tim Atkin & Ellis Connolly, 2013. "Australian Exports: Global Demand and the High Exchange Rate," RBA Bulletin, Reserve Bank of Australia, pages 1-10, June.
    5. Daniel Rees, 2013. "Terms of Trade Shocks and Incomplete Information," RBA Research Discussion Papers rdp2013-09, Reserve Bank of Australia.
    6. Tim Robinson, 2013. "Estimating and Identifying Empirical BVAR-DSGE Models for Small Open Economies," RBA Research Discussion Papers rdp2013-06, Reserve Bank of Australia.
    7. Scott Bowman & Patrick Conway, 2013. "China’s recent growth and its impact on the New Zealand economy," Treasury Working Paper Series 13/15, New Zealand Treasury.
    8. Dungey, Mardi & Osborne, Denise, 2013. "International Transmissions to Australia: The Roles of the US and Euro Area," Working Papers 17208, University of Tasmania, School of Economics and Finance, revised 16 Oct 2013.

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