Impact of the Mining Boom on the Australian Economy Essay Example

Effect on the Economy

Australia is the leading contributor to the global mining resources sector. In 2014, the country exported up to 53 per cent of iron ore in international trade, making it the largest exporter of the mineral. Australia is also renowned in the production of copper, zinc, aluminum, uranium and gold and is the second leading exporter of coal.

The strong mining sector has contributed immensely to the country’s economy. Majorly, the industry has contributed strongly in supporting local small particularly through sourcing for supplies needed in mining activities. This has extended to the creation of job opportunities for the indigenous community and other people from the region. The industry employs as upwards of 200,000 people directly. Many more people benefit indirectly from the industry. This has helped to build careers for young people and develop their talents as well.

Besides, the industry contributes immensely to the governments in taxes and loyalties. The funds are used to provide essential services including infrastructure and services to the general public. More importantly, the boom helped the country to weather the 2008/09 global financial crisis.

Effect on the GDP Components

In the period leading to 2014, Australia experienced an unprecedented growth in the mining industry. The ‘mining boom’ sent shock waves to the Australian economy in a great way. The contribution of the mining industry to the GDP shot from around 2 per cent to over 8 per cent.

The mining boom came along with higher commodity prices that boosted trade. Therefore, people earned more hence increased their purchasing power. The boom led to increased production of goods and services due to a higher aggregate demand. As people noted that the boom may be there for the long-term, demand for particularly for consumer durables and motor vehicles went up.

Investment is an important component of GDP. It is what propels prosperity due to the fact that resources, by themselves, do not spawn prosperity. The mining industry in Australia has been a darling to investors both local and international. The key moments in history include the gold rushes of the 1980s that attracted investments particularly from New York and London. In 2014, Australia’s mining industry attracted foreign direct investments of up to 265 billion dollars, which constituted 38 per cent of the total FDI that year.

Effect on the Macroeconomic Variables

According to Downes et al. (2014), the mining boom led to changes in the exchange rate. In 2013, the real exchange rate was estimated to be 44 per cent higher compared to if there was no mining boom, as indicated in figure below.

The mining boom led to a higher inflation due to high energy prices and reduced unemployment.

Interest rates remained low in the initial periods of the boom, but the rates went up as the labor market became tight.

Macroeconomic Models

The mining boom led to an upsurge in aggregate demand as the household incomes went up. This causes the aggregate demand curve to shift to the right to point B to match the increased income.

Price SAS₂

AD₁ AD₂

1. Output/Income

Government Response

The mining boom majorly benefit the citizens of Australia as the households benefited as the government eased tax and superannuation tax concessions.

Effect on the Government Deficit and Debt

The mining boom brought with it great optimism in Australia. Companies and the government had put forward huge revenue forecasts. However, after 2013, the commodity prices started to decline with no hope of any improvement amid the shrinking commodity market in the key market of China. As a result, the set revenue targets proved to be too optimistic. The government was in trouble due to the successive budget deficits that narrowed down the economy’s fiscal position. The government was forced to repeal the tax on mining profits (MRRT) as the companies’ profits shrank and had to lay off people. The government had to borrow more to counter the growing budget deficit. The debt level went up.

References

Downes P, K Hanslow and P Tulip (2014), ‘The Effect of the Mining Boom on the Australian Economy’, RBA Research Discussion Paper No 2014-08.

Stoeckel A (1979), ‘Some General Equilibrium Effects of Mining Growth on the Economy’, The Australian Journal of Agricultural Economics, 23(1), pp 1–22.