Australia
Australia is one of the first five developed countries in the world. Australia has a democratic form of government where the elected prime minister is the chief executive of the country. The Australian economy has grown tremendously in the last decade and a half. This can be attributed to healthy politics, a stable government, and a wealth of natural resources. Australia has a mixed economy though with a slight inclination towards the free market economy. Australian economy is also seen as a miracle as it has not seen a recession for about twenty four years. Australia also escaped from the 2008 recession with little harm.
A summary of the Australian GDP values from the year 1990 to 2015 can be observed from the graph. In 1990 the GDP of Australia was about 310 billion US dollars. It rose to about 378 billion US dollars in 2001 with about a percentage increase of only 21.9% since 1990. 21.9% might seem a lot but increasing inflation and price level it is quite low.
However if we see the period from 2001 to current then the rise in GDP is manifold. In 2001 GDP was about 378 billion but rose to about 1454 billion in 2014. This is a mammoth increase of about 285%. The GDP rose to a height of 1560 billion US dollars, one of the highest in the world.
A similar trend is also visible in the GDP per capita. It is visible in the data that the GDP per capita remained almost constant from 1990 to 2001 with little variation. But from 2001 onwards the GDP per capita started increasing steeply, reaching a high of about 67500 US dollars in 2013 and 2014. This GDP per capita is one of the highest in the world.
Similar trends are also observed for the real GDP and the real GDP per capita.
The chart shows us the unemployment percent .i.e. of the total labour force. The unemployment rate in the 1990’s was pretty high with up to 10.9% of the entire labour unemployed. But this steadily decreased as the years passed by and for the past two to three years the unemployment percentage has fallen to about 5 percent. This is about half of the value that was in the 1990’s. The fact that the population has also risen makes the unemployment rate falling even more astonishing.
The 2014 population of Australia was about 23 million. This is reflected from the graph below
There has been a steady growth of population in Australia since 1990. It grew by about eight million with about population being 15 million in 1990 and 23 million in 2014. To accommodate eight million more people with keeping the unemployment level below the previous years was a remarkable achievement by the Australians. This is due to the mining boom that took place.
The above graph shows us the import and export trend in Australia. From the graph it is clearly observable that the shape of the import graph (blue) is same as the export graph (red). Also using the previous graphs we can conclude that an increase in exports causes a rise in the GDP per capita of the country. This also serves to explain that the real GDP of a person rises. Therefore, the person spends his extra earned on imports causing the imports quantity to increase. Thus this explain the shape of the export curve and the import curve being approximately equal.
The above pie chart shows the distribution of exported goods from Australia. The major export of Australia is mineral and fuels. The export of minerals and fuels constitutes up to about fifty percent of all the exports. Therefore an obvious conclusion can be drawn from this fact that a major change in minerals and fuels will cause a huge effect on Australia and its economy. The minerals and fuels include iron ore, coal and natural gas. Other noticeable sectors in the Australian export are the services offered by the Australians such as education to foreigners and also manufactured products.
In the above graphs we can observe that the dynamics and the shape of the graphs suddenly changes after 2001. This is due to a huge shock to the Australian economy as the chinese started to import huge amounts of mineral resources from Australia. The price of these commodities shot up but this did not affect Chinese demand. Therefore, this started increasing Australia’s growth by a great percent. The GDP and the GDP per capita of the Australians shot up viciously. We also concluded from the pie chart that a change in mineral and fuel would cause a great deal change in the Australian economy. This happened as the price rose of the commodities but the demand did not seem to curb. Therefore the Australian revenue from exports started to increase manifold.
The living standards of the Australian people changed due to the mining boom that occurred. The effect could be observed from the change in real household per capita disposable income. www.rba.gov.au estimates that without the boom the change in real household per capita disposable income would have been up to thirteen percent worst off in the year 2013.
The blue line in the graph shows the trading gain or the direct relative price effect. The commodities have a higher price associated to them increasing the terms of trade of Australia. This leads to an increase in the real gross domestic income (GDI). This is the purchasing power of the income of the Australian people. The GDI is about six percent higher than would have been without the mining boom.
The pink line shows the effect of the mining boom on the volume of goods and services produced. The mining boost contributes to an increase in mining investments thus increasing the aggregate demand causing a higher GDP. Also the national purchasing power is increased. This causes the consumption to increase and also the other spending components. Therefore this is the one of the cause in the increase in the GDP.
According to RBA the exchange rate in 2013 is about forty four percent higher than i would have been without the mining boom. Therefore it is telling that the Australian exchange rate would have stayed where it was on average for the decade before the mining boom. The appreciation of the Australian currency is directly linked with the terms of trade and the terms of trade of Australia were in 2013 in very good shape due to high commodity prices, therefore it affected the exchange rate too which got better.
The strong economic activity due to the mining boom results in lower unemployment. This is due to the fact that the mining industry would need more labour to cater to its demands, therefore employing more labour demand leading to lower unemployment. It can be seen from the graph above that there is a approximate decrease in unemployment of about 1.25%.
Inflation
The low unemployment rate and the high commodity prices due to the mining boost tend to drag the inflation high. But the high exchange rate in the beginning tends to prevent the inflation from going up as it lowers import prices. But the effect of the low unemployment rate is more persistent than the temporary effect of a high exchange rate, therefore the inflation starts to rise after some time.
The effect on other industries
The mining boom has also helped other industries to grow. This is due to the fact that the real income of the people of Australia has risen. This has resulted in a increase in consumption of the local population therefore the demand of goods increases to the delight of other industries. Similarly industries associated with the mining industries such as transport will also benefit from the increase in the mining boom.
The biggest problem facing Australia, which has not taken its toll yet, but is ready to strike hard, is the end of the mining boom. The biggest success story of Australia is coming back to haunt it. The biggest importer of Australian mineral and fuel was and is china. But the chinese economy is slowing down faster than expected. The Chinese economy is shifting towards consumer based. Therefore the demand of Australian commodities has declined rapidly. Though experts predicted the mining boom to gradually subside, but in an unexpected wave of events, it is finishing rapidly. The commodity prices have also fallen steeply.
Therefore, in Australian circles this issue is being taken gravely, and this time the political parties in Australia fought on the claim of solving this issue.
Impacts
Net exports
The exports of Australia have started to decrease substantially. This is due to the fact that
1) The commodity prices have fallen substantially
2) The overall demand for the product has fallen.
The commodity price of iron ore for example has fallen from $140 to $80 per tonne. This is expected to go down more.
Thus the exports are falling drastically. However, considering the social structure of the Australians, considering the latest generation has not witnessed such recession, therefore it is hard to conceive the fact that the imports will fall as these will tend to be sticky. If not rise, the imports will tend to remain constant.
Therefore with decreasing exports and constant imports, the balance of trade will be affected and the capital account will become negative. Already the foreign debt to be paid by Australia is over $1.4 trillion. Thus this will adversely affect the economy.
Inflation and unemployment
As the mining industries subside, there will be a rise in unemployment. Very recently, according to ABS, the unemployment rate in Australia has grown to about 6.9 percent. This is the highest in several years. This explains the extent of the trouble. To curb the problem of unemployment, another problem would have to be generated, inflation.
Exchange rate
The exchange rate of Australia is dropping pretty steeply. At one time it was about 110 US dollars but now it has become almost 80 US dollars. This is due to the fall in the commodity prices.
The fall in the commodity prices has led to the worsening of the terms of trade. The falling of the terms of trade will cause the exchange rate to fall. This will make imports more expensive and the exports cheaper. However, the demand for exports is unlikely to increase much due to the main export being minerals and the main importer china shifting its economy to consumer based.
However, the imports will become expensive. Therefore the real income of the Australians will fall.
GDP
The GDP growth of Australia has fallen to below 0.5 percent in the last six out of ten quarters. The GDP and the GDP per capita are expected to fall as well. The real GDP and the real income of people have fallen greatly due to the fall in exchange rate.
The speculation and expectation in the country is also low thus discouraging investment and lowering the aggregate demand curve.
Solutions
The Australian government needs to spend money in order to have a multiplier effect. The government can spend on education purposes especially universities and health facilities. This is due to the fact:
1) This will generate employment.
2) can grab opportunity of a more consumer based chinese economy who would be looking for quality university education and good health facilities.
3)above will help earn foreign exchange
4) wil cause a multiplier effect.
The building of universities will generate employment as labour would be needed to construct the building, maintain the building, and also run the affairs of the university. Similarly hospital would also help in such a way.
Chinese economy is now growing more consumer based thus it will be spending more on products. So a quality education in Australia would seem an attractive proposition this also earning foreign exchange and betterment of the terms of trade.
It will also cause a ripple effect causing to increase consumption and thus increasing Aggregate demand.