Economics - Mining Boom - Australian Bureau of Statistics

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Economics Assignment

Assignment Task

Question 1 Some business commentary suggests that recently the Australian economy has experienced a ‘mining boom’. It is suggested the boom consisted of three phases: 1) a prices boom phase where the price for existing mining outputs increased substantially; 2) an investment phase characterized by the construction of mining infrastructure; 3) a production phase characterized by a significant increase in mining production. For an example of business commentary see: Focusing on how Gross Domestic Product (GDP) is measured through its various components, explain in detail how each of these phases of the ‘mining boom’ impacts on GDP. Make comment on both potential short term and long term effects of the boom and provide statistical evidence to support claims wherever necessary. Question 2 In the 2016-2017 Federal Budget, the Government seeks to focus on ‘jobs and growth’. In part, the policies designed for improving economic growth consists of a focus on the following elements: “The Government is improving the tax system, providing better access to global markets through new export trade agreements, promoting competition, providing vital infrastructure, supporting innovation and entrepreneurship, encouraging high–tech jobs and helping young people get into work. Discuss and evaluate this government’s focus on how it wishes to promote growth in the context of the typical determinants of economic growth. That is, compareand contrast the standard economic determinants of economic growth with these articulated policies in the 2016-17 Federal Government Budget. Question 3 Using data from the Australian Bureau of Statistics (ABS)collect information on unemployment and inflation rates for Australia over the period 2005 to 2015, inclusive. Be explicit and define and provide sources for the data obtained. Cite the ABS catalogue number and the date for each data point collected. Plot on a single diagram the relationship between inflation and unemployment, measuring inflation on the vertical axis and unemployment on the horizontal axis. Comment on whether any relationship exists between these variables and any implications of your findings. Question 4 Employ the aggregate demand and supply model for the Australian economy, to analyse the consequences for real GDP and the general price level of the following scenarios. Assume that the economy operates in the intermediate range of the aggregate supply curve. In your response clearly state your assumptions andillustrate your answers with diagrams. (a)the price of iron ore, a major export product, falls substantially, (b)a drought leads to a substantial fall in Australian agricultural output, (c)the government spends significant money in developing a broadband internet network across the country, (d)the price of oil, a product Australia primarily imports, fall substantially.

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Solution:

Question 1: Mining Boom and its effect on the GDP of Australian Economy There were three phases of mining boom in the Australian economy which started with the increasing prices of the products of the mining sector that rose tremendously resulting in GDP increasing due to price inflation. The second phase of the mining boom consisted of the vast investments of the Australian Government in the mining sector that led this sector to grow increasingly and other sectors which were closely related to the mining sector also developed. This second phase of investments in the mining sector overlapped the first phase of increasing prices that lasted till the year 2011. The third phase consisted of rising productivity in the mining sector which has reached its maximum to the point that supply has started exceeding the global demand and there is stagnation in the mining sector. Obviously the three phases of boom in the mining sector have had its diverse effects on the GDP of the economy. Gross Domestic Product of an economy is the totality of the consumption expenditure, investment expenditure, government expenditure and also net exports. First Phase of the mining boom: When prices of mining products increase, the GDP also increases due to two reasons – one as the price level increases, there is more income for the wage earners of mining sector and their consumption level increases. Similarly when the exports of mining output increases, there was an increase in the net exports value as Australian exports were mainly dependent upon mining output and metals like Iron and coal. This came to the effect of per capita disposable income increasing 13% more than it would have been without the boom (Tulip, 2014). The second phase of investments in the mining sector which almost quadrupled during the years after 2008-11 led to the development of other related industries like construction, engineering and business services (Bramble, 2015). This was mainly due to the multiplier effect in the economy where government’s autonomous investment in the Australian mining sector, had its multiplier effect on bring about private investments in other sectors and the first and second phases of the mining boom that led to increase in the real GDP towards full employment and this increased employment in the economy.(as shown in the figure below)

However the third phase of increasing productivity in the mining sector was accompanied by increasing supply of mining output and energy resources from other countries, which led to the collapse of the commodity prices that led the Australian exports value to fall as a result of which the GDP growth rate dropped down for the last two to three years as shown in the graph below.

The short run and long run impacts of increasing GDP over the last decade from 2005 to the year 2012 has resulted in decreasing the unemployment of the country. However over the last two to three years, there has been an increase in unemployment due to stagnation in the mining sector and falling price levels (Yeomans, 2016). Question 2: Determinants of growth and fiscal budget of 2016-17 There are various demand and supply side factors that affect the growth and development of an economy. An expansionary budget such as the current budget of 2016-17 would improve investments in various sectors and generate employment which would increase the GDP growth rate of the economy. The standard determinants of growth in an economy include supply factors such as improvements in natural resources and enhancing skills and employment opportunities for the human resources. Growth of an economy can also be induced by making investments in the capital goods industry which will increase the production of goods and services in the economy. Innovation and technology can also increase efficiency allowing for increasing productivity and economic growth. Similarly the demand side factors affecting economic growth includes increased aggregate demand in the economy and also increasing efficiency which includes increases in productive efficiency by producing in the least cost way and also allocative efficiency by putting the resources in the optimum uses for optimum purposes. Discussing the current budget on the face of standard determinants of growth will tell us that the Australian government is on the expansionary phase to turn the mining sector based development to a broad based development that is focused on other manufacturing industries and the service sector. The growth of employment opportunities have been in the business services sector and goods related and household services sector rather than in the mining and construction sector. More than 3 lakh jobs were created in these three sectors which has diversified the sources of growth and development for Australia which was concentrated in the mining sector development during the boom (Budget, 2016). This has led to improvements in non-mining sectors of the economy and this was boosted by the lower exchange rate that improves the exports opportunities in the light of new free trade agreements signed by Australia with south Asian countries. The Government has lowered the tax rate for full time wage earners and small business for encouraging them to expand themselves. The new trade agreements signed by Australia with China, Japan, etc, have increased the competitiveness of Australian exports and this was augmented by the expansion of investments in export oriented industries. Investments in the infrastructure sector have also improved transportation of people and goods across Australia. Lowering the tax rates for the wage earners from increasing the tax rate from $80000 to $87000 as the income above which the tax rates are applicable would encourage workers to work more and thus workforce participation rate would increase. Question 3: Inflation and Unemployment in Australia The data on inflation (CPI-percentage change) and Unemployment is collected from the ABS website and tabulated in the table below.

We can see a negative or inverse relationship between unemployment and inflation as given by the short run Philips curve. This is shown by the trend line where it shows the negative relationship between the two. Philips curve concept as given by A.W. Philips says that when inflation increase in the economy, this means that more goods and services are being produced and sold which means that there is increase in the employment of resources (including human resources) and this reduces unemployment in the economy. During the recent years in Australia, we can see that inflation is at its lower boundary nearing 0.2 and unemployment is at its higher boundary (above 6.2 or so) as can be seen from the table. Question 4: Effect of these changes in real output and price level (using AS-AD model)

The assumptions we are taking in this model are

Australian economy is operating below full employment level of output
The aggregate supply curve has all the three ranges of Keynesian range, classical range and intermediate range and currently the economy is operating in the intermediate range.
There are unemployed resources in the economy as the real output is below the Yf- full employment output

The changes and its effects on real output: (a)the price of iron ore, a major export product, falls substantially,

When the price of iron ore, which is the major exports of Australia decreases, the net exports (which is the exports- imports) decreases. As net exports is one of the component of aggregate demand, a fall in net exports will result in aggregate demand shifting to the left to AD2 as shown in the figure above and this decreases the output and price level. As there is an increase in unemployment, the price level also goes down (Layton & Robinson, 2012). (b)a drought leads to a substantial fall in Australian agricultural output,

In this case, as the supply of agricultural output is decreased due to a drought, this results in short run aggregate supply curve shifting to the left from SAS1 to SAS 2. This leads to increase in the price level and further unemployment as shown in the diagram above. (McEachern, 2012) (c)the government spends significant money in developing a broadband internet network across the country,

As government invests money in expanding broadband network across Australia, it shifts the aggregate demand to the right to AD2 as shown in the figure above. As government expenditure is part of the aggregate demand curve, any increase in govt expenditure will shift the AD curve to the right. This increases the real output in the economy and also increases the price level as employment as increased. (Layton & Robinson, 2012) (d)the price of oil, a product Australia primarily imports, fall substantially.

When the prices of oil (world prices) which is one of the major imports for Australia decreases, there is an increase in the net exports (as the imports value as decreased). Net exports = exports value- imports value. (Mankiw, 2009) This will increase the net exports and there by the aggregate demand will shift to the right increasing the real output of the economy and also the employment of resources and hence the price level would also go up.

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