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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
    as

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    File URL: https://www.rba.gov.au/publications/rdp/2013/pdf/rdp2013-03.pdf
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    References listed on IDEAS

    as
    1. repec:bla:ecorec:v:70:y:1994:i:209:p:204-19 is not listed on IDEAS
    2. 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.
    3. Adrian Blundell-Wignall & Robert G. Gregory, 1990. "Exchange Rate Policy in Advanced Commodity-Exporting Countries: The Case of Australia and New Zealand," OECD Economics Department Working Papers 83, OECD Publishing.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Australian macroeconomy; economic performance; terms of trade; resource boom; industry analysis;
    All these keywords.

    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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