Final Exam

Question 1

What were the reasons for the Botany Bay Decision

Answer 1

While naval and imperial aspirations played a role in choosing Australia as the convict destination, it was largely due to the potential for trade with a region increasingly important to trade

The cost of transportation would be reduced by returning with valuable commodities from the region (particularly China).

Question 2

Describe Australia’s trade balance through history

Answer 2

The reliance on British subsidies would have seen a negative trade balance in Australia’s colonial times.

The emergence of the wool industry and gold would have improved the trade balance but the recession in the 1890s would have seen a deterioration.

Australia’s trade balance was positive in each decade from 1900 to 1940 (excluding the 1920s when a small deficit was recorded). However, it has been negative in each decade since then and this pattern as continued into the 2010s.

Question 3

Who were our key trading partners

Answer 3

When Australia was established as a British colony, there were aspirations for trade with Asia and the countries in Australia’s region were important to trade. However, throughout much of Australia’s history, the United Kingdom (1820’s – 1960’s) and European countries have been Australia’s key trading destinations, particularly due to the high level of integration into labour and capital markets between Australia and Britain and the preferential treatment afforded to the UK.

Question 4

What were out key export markets?

Answer 4

The relationship with the UK was bilateral with Australia providing mostly primary products (wool, minerals, wheat etc) and the UK maintained its position as the top export market until the 1965=66 (excluding in 1941-42 when it was briefly surpassed by the United States) when it was overtaken by Japan, representing a shift the Asian Pacific region. Subsequently, Japan was overtaken by China during the mining boom and Australia remains heavily reliant on China today.

Question 5

What were our key import markets?

Answer 5

Similarly, the UK dominated imports until the 1960s despite the US accounting for the largest share during times of international disruption including both World Wars and the Great Depression. Since the 1980s, this has been the US and Japan before a shift towards China in the late 2000s.

Question 6

What are our main exports

Answer 6

Notwithstanding periods of fluctuations due to various booms, Australia’s export base has been expanding over time. A narrow range of agricultural commodities were exported to the British empire initially and export growth was typically slow and linked to the agricultural cycle. Following the second world war, the export base became more diversified owing to the rise in manufacturing, growing importance of services (although these had always played a significant role) and minerals. The geographical location also shifted towards Australia’s region.

Agricultural products continued to be critical to exports in the 190s and 1960s, particularly wool, wheat, beef, sugar and butter. This shifted in the 1970s when resources such as coal, iron ore, natural gas and gold dominated.

Question 7

What were the average export growth rates in 1901-1945, the 1950s-1970s, 9080 and 2004-04

Answer 7

Export growth averaged 1.2 per cent between 1901-1945 compared to an average of 3.9 per cent between 1950 and the 1970s, 4.5 per cent between 1980 and 2004-05 and 3.9 per cent thereafter.

Question 8

What are some policies that have influenced trade patterns?

Answer 8

Policy has the potential to increase or decrease trade and determines the mix of exports and imports. Policy decisions with major trade implications include:
 The Bigge Commission in the 1820s which promoted the wool industry
 Selection legislation which broke up the dominance of large farms and prompted rural diversification and had implications for the growth of the wheat industry
 The lifting of the embargo on iron ore in the 1960s which allowed the mining booms
 The recognition of China which fostered a closer diplomatic and trade relationship
 Protectionist measures introduced in the depression which, while typical of the time, worsened the economic downturn.

Question 9

Openness prior to Federation?

Answer 9

Australia has always been a small and relatively open economy. However, the level of openness (as measured by two way trade as a percentage of GDP) has fluctuated throughout Australia’s history reflecting policy decisions, the international global economy and domestic factors (including climate events). While data on openness prior to Australia’s federation is not as readily available and is associated with greater measurement difficulty, exports and imports would have increased dramatically during the 1800s as wool became a central part of the economy and then gold during the 1950s. The ‘Federation drought’ that contributed to the economic downturn beginning in the 1890s would have seen exports reduce and an increased reliance on imports, with the overall impact dampening openness.

Question 10

Openness up to WW2?

Answer 10

At the time of Federation, Australia’s two-way merchandise trade accounted for 42.7 per cent of GDP and averaged 40 per cent until the commencement of WW1 in 1914 when it fell sharply due to international disruptions to trade (in Australia’s case, this particularly affected exports given Australia’s isolation from the conflict). While the ratio recovered in the 1920s as wool exports picked up, it trended down from the mid-1920s to the end of WW2. The Great Depression had a pronounced impact on the openness of the economy as, in general, the international community (including Australia) increased protectionist measures in an effort to ‘keep demand at home’ (although, this worsened the decline). Between the 1930s and WW2, openness averaged 28 per cent.

Question 11

Openness following WW2?

Answer 11

The share of two-way trade in the Australian economy rose dramatically following WW2 and averaged 44 per cent between 1945-46 and 1954-55, partly due to the commodity boom during the Korean War. However, following the Korean War, domestic policy was increasingly focused on supporting domestic industry, contributing to a decline in the ration to between 23-30 per cent throughout the 1960s and 1970s and a record low of 24.9 per cent in 1971-72. This downward trend was halted and reversed during the 1980s with a shift towards a more open international economy (this trend was not limited to Australia) with the ratio reaching 40.9 per cent at the end of the 20th century and climbing further to 44.9 per cent in 2008-09 as the mining boom boosted trade (although as the mining boom winds down, this has again began to decline).

Question 12

Describe Australia’s terms of trade

Answer 12

The terms of trade expresses a country’s export prices relative to its import prices. A higher terms of trade enables more imports to be purchased with the same amount of exports.

Since federation, Australia has recorded three large spikes in the terms of trade: during the 1950s commodity boom stemming from the Korean War, during the large rise in exports in the 1920s (relating primarily to wool) and the mining boom from 2003-04 to 2011-12.

There has also been three marked downturns in the terms of trade: during the two world wars and the Great Depression.

Question 13

What was the import of Australia’s physical location

Answer 13

Australia’s geographical location has been a major factor in its economic development. Although Australia has largely overcome the ‘tyranny of distance’, the isolation from European and American markets limited prospects in its early years as it increased shipping costs and made exports such as meat uncompetitive. Nowadays, the greater proximity to Asia has benefited Australia.

Question 14

Relationship with the UK?

Answer 14

Unsurprisingly, Australia’s place in the world until WW2 was highly dependent on Britain with a high level of integration in its markets. Britain provided a large market for Australia (particularly for wool and wheat), acted as a source of capital and provided the majority of migrants for several decades. Furthermore, Britain was able to supply manufactured goods and was the source of Australia’s institutions and practices. While Australia has diversified its economic relationships, the UK re mains an important partner.

Question 15

Relationship with the US?

Answer 15

The US became a source of capital from the 1920s but became increasingly important in the 50s. It provided a source of high tech manufactured goods and acted as a market for Australia’s commodities. Unlike the UK, it is has not been a large source of immigrants or labour.

Question 16

Relationship with Asia?

Answer 16

The Asia Pacific region has become increasingly important to the Australian economy since the conclusion of the second world war and it now Australia’s major export destination

Question 17

Australia’s per capita income performance?

Answer 17

In terms of economic performance, Australia has performed relatively well. Mere decades after the establishment of the colony, Australia’s per capita incomes were among the highest in the world and they became the highest during the gold rush. While a succession of negative shocks (the depression of the 1890s, world war one and the great depression) saw living standards stagnate, they remained elevated and Australia fared much better than comparable countries. Australia now ranks second (after Norway) for human development and has the 13th largest economy despite having the 50th largest population.

Question 18

Overview of the Gold rush?

Answer 18

1) The gold rush was characterised by a large population increase and spread of wealth generated from gold.
2) Significant boost to exports and, as the migration did not reverse following the boom, increased potential GDP in Australia.
3) While it drew labour from other industries, there is little evidence of a resource curse largely due to the spread of opportunity, increase in aggregate demand and the limiting of exchange rate impacts (no floating currency).

Question 19

Overview of the 1960-70 boom?

Answer 19

The 1960s and 1970s: increase in coal, irone ore and bauxite following lifting of embargo and rising demand as Japan develops. Lead to an increase in inflation and investment

Question 20

Overview of the mining boom?

Answer 20

1) a surge in prices of key commodities such as iron ore and coal resulted in a massive increase in national income, investment and employment in Australia.
2) Lasted for over a decade and served to increase real wages and GDP.
3 As with previous booms, the resource cure was limited: while manufacturing declined due to the appreciation of the dollar, part of the impact was offset by rising demand for their products, stable and relatively efficient institutions also contributed by reducing rent seeking activities.

Question 21

What are 4 major similarities between the mining booms?

Answer 21

1) The importance of global factors: the Gold rush was made more pronounced by the end of the Californian gold rush and increased immigration, the 70s boom was largely due to increased demand from Japan, the 80s stemmed from the OPEC price rises and the mining boom was due to China’s demand and relative prices of commodities.
2) Unlike countries that experienced the resource curse, in each case the boom strengthened the economy through higher mining investment, higher income, increased infrastructure to service mines, rising population growth and higher employment that otherwise
3) Not all sectors benefited from the booms with agriculture and manufacturing experiencing difficulty in attracting and retaining labour and investment and reduced competitiveness.
4) Each boom saw stronger inflationary pressure

Question 22

What was the population impact of the gold rush?

Answer 22

The discovery of gold led to a surge in migration to Australia, increasing the labour supply and the capacity of the economy. The migrants were predominately working aged men, resulting in a significant increase in the participation rate. Two of the ‘three P’s’ of productivity, production and population increased and so did per capita incomes.

After the gold rush, a large portion of migrants stayed in Australia and a demographic bubble was createdq

Question 23

Economic impact of the gold rush (8)?

Answer 23

1) large rise in population and participation stimulated other sectors including banking, housing and food.
2) Gold overtook wool as the most valuable export
3) Also had a destabilising effect as there was a glut of goods, labour was drawn from other industries and there was civil unrest stemming from license fees
4) Unlike later booms, it was not accompanied by a large rise in investment
5) GOld remained central until the 1890s
6) in terms of gross value added, it was the largest with mining accounting for 35%
7) Exceeding strong wage growth
8) Surge in per capita income (to the highest)

Question 24

Why did the 1960-72 boom happen?

Answer 24

Another major mining boom in Australia’s history occurred between 1960-72 stemming from a strengthening in global and domestic economies putting upwards pressure on commodity prices, the lifting of the iron ore embargo and the industrialisation of Japan (which is naturally resource poor and in close proximity). There has also been investment in port facilities prior to this.

Question 25

What were the characteristics of the 1960-72 boom (8)?

Answer 25

1) More broadly based than previous booms (including a smaller boom in the late 19th century) but was centred around coal, iron ore and the development of oil and bauxite discoveries.
2) Export prices increased strongly and mining investment rose from 0.3 to 3 per cent of GDP. 3)
Employment increased solidly by 3 per cent per annum in the second half of the 1960s
4) similar to other booms, wages growth was strong.
5) By this stage, mining was very capital intensive and a significant amount of investment was undertaken.
6) The nominal exchange rate remained relatively steady for the majority of the boom but the growth in the money supply was over 20 per cent in the early 1970s and inflation increased sharply.
8) The boom continued to the OPEC price change and surge in oil prices when commodity prices stagnated and investment fell.

Question 26

Describe the 1970 to early 1980s boom

Answer 26

There was a resurgence in mining investment and growth in 1977 as the high oil prices prompted companies to find alternatives. As such, the major resources were coal, oil and gas. This boom was relatively short lived and ended with the global economic downturn in 1981 as energy demand was less than expected while distortions stemming from renewed wage growth and inflation combined with tight policies led to a downturn in Australia.

Question 27

Economic impact of the mining boom (9)?

Answer 27

1) price of mining exports more than triple over the decade to 2012.
2) This was accompanied by a sharp increase in the terms of trade, investment and an appreciation of the Australian dollar.
3) Mining increased from 2 per cent to 8 per cent of GDP over the decade to 2012.
4) The mining boom serves to increase real per capita household disposable income by 13 per cent over the ten years to 2013
5) increase real wages by 6 per cent
6) reduce the unemployment rate by 1¼ percentage points.
7) Real GDP was increased by 6 per cent due to the mining boom although some of the benefits would have been passed on to foreign investors.
8) The Australian economy is still continuing to transition from the mining boom to broader based growth, although, the drag imposed by the winding down of mining investment is expected to diminish over the coming years.
9) Unlike previous commodity price booms (the gold rush), there was no massive population impact of the mining boom partly as the benefits being concentrated as the industry is more capital intensive than labour intensive.

Question 28

Negatives of the mining boom

Answer 28

While the mining boom provided a huge boost to nominal income and employment, there is evidence that it also had negative impacts on other industries.

This happened primarily through the exchange rate, with appreciated markedly during the boom and made exports in other industries less competitive. This dampened growth in agriculture (which is heavily reliant on exports) and manufacturing, although it is important to note that the manufacturing sectors also benefited from the increased demand that stemmed from the mining boom (the decline of manufacturing had been occurring for decades prior to the boom). Interest rates were also higher than they otherwise would have been due to the tighter labour market.

Question 29

Output and investment in mining booms?

Answer 29

The current boom has also been broader based but focused on iron ore and coal. Mining investment as a share of GDP has been significantly higher than in previous booms and the, in terms of output, the contribution was larger than the in 20th century (but below that of the gold rush).

The terms of trade effect was unprecedented and is the first boom to take place with a floating currency which offers a degree of flexibility by allowing for an appreciation of the dollar rather than inflation (as happened in the 1970s).

Question 30

Contribution of mining to other industries?

Answer 30

While the direct impact of the mining sector has boosted growth across many periods of Australia’s history, the indirect flow on effects are also significant. While mining has become less labour intensive over the decades, there are still significant employment effects through increased aggregate demand, particularly in areas such as construction, finance and other services industries.

Question 31

How do countries avoid the resource curse?

Answer 31

Botswana, Norway, Chile,
and Canada have taken measures (thus far) to manage their resource abundance in ways that have promoted national growth and development sustained a prudent, balanced approach to their economic management (as reflected in the growth and distribution of public and private consumption and investment, and the accumulation of debt).

Created and sustained the institutional arrangements that prevented having the wage, income, and wealth effects in the booming resource sectors from
progressively degrading the scale, scope, and dynamism of activities in the non-resource sectors.

Question 32

Countries that have suffered from the resource curse?

Answer 32

resource-dependent countries such as
Central African Republic, DRC, Nigeria, Zambia,
Venezuela, and Argentina.

These countries have typically used the rents generated in centres of high economic density in
ways that compound the problems created by economic distance (particularly the high costs of
transport and communication and economic and social intermediation) and have generally failed to
counteract or dismantle economic barriers (especially the bureaucratic obstacles, delays and risks
of business formation and enterprise).

Question 33

What are the main ways we interact with the global economy?

Answer 33

 Primary ways we interact with the global economy include external trade, capital (including foreign investment) flows and immigration which add to Australia’s international integration. Over Australia’s history, this has changed significantly with the economy becoming increasingly globalised and influential. That said, there are parallels and much has remained constant.

Question 34

What was our place in the world in early history?

Answer 34

 Australia was initially established as a convict colony, reliant on British support and ‘subsidies’ but with the expansion of the pastural sector and subsequent rise in mineral exports (driven by the gold rush), Australia’s integration with a wider base of markets (including Britain, Germany and France) expanded and Australia’s living standards became the highest in the world.

Question 35

What happened to our relative living standards in the 20th century?

Answer 35

 The depression of the 1890s saw Australia’s international position decline and the loss of the position of highest living standards and Australia’s relative real GDP per capita declined over the 20th century as the first world war and great depression weakened the economy. Furthermore, the relative strength of Canada and the US also contributed. This was predominately due to relative changes in GDP growth (per capita income growth remained strong over the century) rather than a population effect as while Australia’s population growth exceeded that of the UK, it was markedly slower the Canada, the US and Argentina (which we outperformed).

Question 36

What drove the increase in immigration in the 1900s

Answer 36

 Concern over low population growth prompted a ‘populate of perish’ mentality which was Australia seek to increase the labour force through immigration, further integrating it into the global economy (particularly as in the aftermath of WW2, migrants became much more diverse).

Question 37

Summary of the 20th century

Answer 37

1) small, open, export-dependent economy that relied on primary production for export earnings to pay for imports and foreign capital.
2) Foreign investment and immigration augmented domestic sources of capital and labour. A dual economy developed between the rural export sector and the urban manufacturing and service sectors, where most Australians lived and worked. 3) These features were qualified by restrictions placed on immigration, import barriers and regulation of capital flows. In the last two decades of the century, globalisation recreated some of the openness lost in the middle part of the century.

Question 38

When have we generally performed well?

Answer 38

Periods of faster or slower economic growth in Australia coincided with similar patterns in the global economy, leading to a close correlation between the pace of expansion internationally and domestically

Question 39

Summary of foreign investment

Answer 39

Economic growth was faster in Australia as a result of foreign capital inflow than it would have been if it had been less or absent altogether because it increased the rate of domestic investment. In the long run, this was a major benefit to Australia for its integration into the international economy, even if in the short run there

It was only in periods when capital could not be attracted and repayments became a burden that Australian living standards declined.

Question 40

Summary of immigration

Answer 40

Because migrants generally had a higher work participation rate than the Australian-born population, their absence would have meant a disproportionate reduction in the size of the labour force and its capacity to grow.

This latter effect was stronger in the late nineteenth century and first half of the twentieth; in the later twentieth and early twenty-first centuries

Migrants added to the stock of skills in the labour force and, contributed to a higher level of skill in the workforce. Some migrants brought capital and enterprise that would not otherwise have entered the Australian economy.

Question 41

5 long-run determinants of growth?

Answer 41

1) productivity
2) Demographics
3) Natural resources
4) Climate and Location
5) Institutions

Question 42

Explain productivity and long run growth

Answer 42

Productivity growth: although this has slowed in recent years, it has historically been quite high. Driver as growth as it increases potential output (more produced with same inputs)

Question 43

Explain demographics and long run growth

Answer 43

from the establishment of the convict colony, Australia has had a favourable demographic consisting of mostly working age skilled men. Participation as been quite high historically and relatively high levels of skilled migration have ensured a favourable labour force and growth in demand.

Question 44

Explain natural resources and growth

Answer 44

Australia has an extremely high resource to population ratio and while this can undermine growth without proper economic, legal and political institutions, this has provided a large boost to growth across Australia’s history (including land available)

Question 45

Explain geography and growth

Answer 45

Australia has largely overcome the ‘tyranny of distance’ that hampered growth and competitiveness in the early years. Nowadays, the close proximity to Asia is a benefit to Australia. In terms of climate, the wool industry has grown but severe and prolonged weather events such as drought have the potential to undermine long run growth due to path dependency

Question 46

Explain institutions and growth

Answer 46

Australia has strong institutions which, while stable and generally trusted by international investors, have proven to be willing to adapt to challenging situations and take action to pursue economic growth. Strong property rights, legal systems and income redistribution have not only aided in avoiding the resource curse but have promoted economic growth across periods

Question 47

Overview of OECD findings

Answer 47

The OECD has found that Australia has not performed as well as would be expected based on its economic policy settings and notes that geography (distance to world markets, natural resource endowments and population patters) can help explain differences in economic growth between countries.

Question 48

Explain OECD factors

Answer 48

Education (which has implications for productivity) has implications for long-run growth. The OECD estimates that an 10 per cent increase in human capital would correspond to a rise in long-run GDP per capita of 4-7 per cent.

Variability of inflation, the inflation rate, tax burden, trade exposure and research and development were also identifies as determinants. Spending on health and education were identified as being beneficial, as was infrastructure development.

While Australia has largely overcome the tyranny of distance, its isolation from world markets (limiting economies of scale, increasing shipping costs, limiting the diffusion of technology and therefore productivity) has had an impact on lon-run income levels (particularly as missed opportunities early on in Australia’s development continue to have significance). Distance between domestic markets has similar effects

Question 49

OECD explanation of variation

Answer 49

Overall, physical and human capital accumulation, labour and the level of technology only explained approximately 1/3 of variation in GDP per capita between countries while the inclusion of economic geography brought this to 1/2.

The OECD found that Australia’s location has had a net negative impact on Australia’s long-run economic development while natural resources were found to have contributed an average of 1.7 per cent to GDP per capita compared to the average country (similar to Norway, Canada and Denmark but unlike Argentina) as Australia’s strong institutions have ensured a misallocation of resource rents has not been as prevalent and damaging as in developing countries.