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Implications for the Australian Economy of Strong Growth in Asia

Author

Listed:
  • Michael Plumb

    (Reserve Bank of Australia)

  • Christopher Kent

    (Reserve Bank of Australia)

  • James Bishop

    (Reserve Bank of Australia)

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.

Suggested Citation

  • Michael Plumb & Christopher Kent & James Bishop, 2013. "Implications for the Australian Economy of Strong Growth in Asia," RBA Research Discussion Papers rdp2013-03, Reserve Bank of Australia.
  • Handle: RePEc:rba:rbardp:rdp2013-03
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    File URL: http://www.rba.gov.au/publications/rdp/2013/pdf/rdp2013-03.pdf
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    References listed on IDEAS

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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, March.
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    Cited by:

    1. repec:bla:ozechr:v:57:y:2017:i:3:p:291-315 is not listed on IDEAS
    2. 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.
    3. Tim Robinson & Tim Atkin & Mark Caputo & Hao Wang, 2017. "Macroeconomic Consequences of Terms of Trade Episodes, Past and Present," Australian Economic History Review, Economic History Society of Australia and New Zealand, pages 291-315.
    4. Peter Downes & Kevin Hanslow & Peter Tulip, 2014. "The Effect of the Mining Boom on the Australian Economy," RBA Research Discussion Papers rdp2014-08, Reserve Bank of Australia.
    5. Manalo, Josef & Perera, Dilhan & Rees, Daniel M., 2015. "Exchange rate movements and the Australian economy," Economic Modelling, Elsevier, vol. 47(C), pages 53-62.
    6. Knop, Stephen J. & Vespignani, Joaquin L., 2014. "The sectorial impact of commodity price shocks in Australia," Economic Modelling, Elsevier, vol. 42(C), pages 257-271.
    7. Adam Gorajek & Daniel Rees, 2015. "Lower Bulk Commodity Prices and Their Effect on Economic Activity," RBA Bulletin, Reserve Bank of Australia, pages 31-38, September.
    8. Kenneth W. Clements & Jiawei Si & Thomas Simpson, 2016. "Understanding New Resource Projects," Review of Income and Wealth, International Association for Research in Income and Wealth, pages 584-600.
    9. Tim Atkin & Ellis Connolly, 2013. "Australian Exports: Global Demand and the High Exchange Rate," RBA Bulletin, Reserve Bank of Australia, pages 1-10, June.
    10. Dmitriev, Alexandre & Roberts, Ivan, 2012. "International business cycles with complete markets," Journal of Economic Dynamics and Control, Elsevier, pages 862-875.
    11. Tim Robinson, 2013. "Estimating and Identifying Empirical BVAR-DSGE Models for Small Open Economies," RBA Research Discussion Papers rdp2013-06, Reserve Bank of Australia.
    12. Mardi Dungey & Denise Osborn & Mala Raghavan, 2014. "International Transmissions to Australia: The Roles of the USA and Euro Area," The Economic Record, The Economic Society of Australia, vol. 90(291), pages 421-446, December.
    13. Kenneth W. Clements & Liang Li, 2014. "Valuing Resource Investments," Economics Discussion / Working Papers 14-27, The University of Western Australia, Department of Economics.
    14. Sean Langcake & Tim Robinson, 2013. "An Empirical BVAR-DSGE Model of the Australian Economy," RBA Research Discussion Papers rdp2013-07, Reserve Bank of Australia.
    15. repec:eee:inecon:v:108:y:2017:i:c:p:351-367 is not listed on IDEAS
    16. Mariano Kulish & Daniel Rees, 2015. "Unprecedented Changes in the Terms of Trade," RBA Research Discussion Papers rdp2015-11, Reserve Bank of Australia.
    17. Peter Tulip, 2014. "The Effect of the Mining Boom on the Australian Economy," RBA Bulletin, Reserve Bank of Australia, pages 17-22, December.
    18. Ivanova, Galina, 2014. "The mining industry in Queensland, Australia: Some regional development issues," Resources Policy, Elsevier, vol. 39(C), pages 101-114.
    19. Kulish, Mariano & Rees, Daniel M., 2017. "Unprecedented changes in the terms of trade," Journal of International Economics, Elsevier, pages 351-367.
    20. David Jacobs & Thomas Williams, 2014. "The Determinants of Non-tradables Inflation," RBA Bulletin, Reserve Bank of Australia, pages 27-38, September.

    More about this item

    Keywords

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

    JEL classification:

    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • N15 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - Asia including Middle East
    • N17 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - Africa; Oceania
    • Q33 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Resource Booms (Dutch Disease)
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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