Analyzing the Economic Impact of the Australian Mining Boom (ECB2300)

This report examines the profound impact of the Australian mining boom, which began in 2003, on the country's economy. It analyzes the boom's effects on various components of GDP, including the manufacturing and service sectors, and how it influenced macroeconomic variables such as interest rates, exchange rates, and savings. The report applies macroeconomic theories, particularly the IS-LM model, to explain the boom's impact on the money and product markets. Furthermore, it discusses the government's fiscal and monetary policies in response to the boom, including tax adjustments and interest rate management. The conclusion highlights the significance of the mining boom as a major economic event, its influence on the global financial crisis, and the criticisms of the government's fiscal policies. References from various academic sources are also provided to support the analysis.

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ECB2300 MACROECONOMIC POLICY SEMESTER 1 2018
MACROECONOMICS ASSIGNMENT
TOPIC: EXPLAIN THE IMPACT OF MINING BOOM ON
THE ECONOMY OF AUSTRALIA

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Table of contents
Introduction................................................................................................................................3
Effect of the mining boom on the economy of Australia...........................................................3
Impacts on the components of GDP.......................................................................................3
Impact on the other macroeconomic variables of the economy.............................................4
Application of macroeconomic theories in the event.................................................................5
IS-LM model..........................................................................................................................5
Response from the side of the government................................................................................8
Fiscal policies of the government...........................................................................................8
Monetary policies of the government.....................................................................................8
Conclusion..................................................................................................................................9
Reference..................................................................................................................................10

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Introduction
The mining boom in Australia is considered a significant event for the economy of the
country. In terms of the absolute impact it had on the economy, it is often compared with
other influential events such as the great depression of 1929. Any kind of boost in the
economy influences the other sector as well through the chain effects. This has also been the
situation in case of the mining boom in Australia. The aim of this paper is to discuss the
economic impacts and the role of the government following the mining boom that the
economy of the country experienced. The study encompasses the macroeconomics principles
associated with the event and theories which best explain the spread of the influence of the
big event.
Effect of the mining boom on the economy of Australia
Impacts on the components of GDP
The official boom in the mining sector of the country started when iron ore was found near
Pilbara, Australia in the year 2003. Since then the economic map and the contribution of each
of the sectors on the GDP of the country have changed significantly. Before the mining
booms in the economy of Australia, a part of the manufacturing sector and the whole service
sector got benefitted. Dwyer et al. (2016) stated that the rising national income of the country
following the boom resulted in the overall economic activities of the service industry.
However, it is important to note that the whole manufacturing sector of the economy did not
get benefitted from the mining boom. This is due to the fact that, the mining boom also
increased the value of the currency of Australia.
Figure 1: the increase in the value of the Australian dollar
(Source: Siva et al. 2016)
Figure 1 clearly shows the increase in the value of Australian dollar following the mining
boom in the country. This increased value of the Australian currency negatively affected

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sectors that relied mostly on export. For example, agriculture sector of the Australian
economy was severely affected following the boom as the demand for the agricultural
product of the country fell due to the increased actual prices of the products. Apart from that,
a part of the manufacturing sector that had a goal to substitute the import also faced problem
due to the boom. The manufacturing of textile, clothing, footwear experienced a reduction in
the production and economic downfall. McLennan, Becken & Moyle (2017) commented that
in general parts of the economy that did not rely much on the import got severely affected by
the mining boom.
Nevertheless, in terms of economic volume, the positive impacts of the mining boom on the
economy were huge compared to the negative negligible impacts. The immediate impacts of
the mining boom were the increasing wages of the workers in the mining industry that got
transferred to the other sectors of the economy. The high-profit margin and hence the high
investment rates increased the performance of the service sector thereby benefiting the
service sector of the economy as well.
Impact on the other macroeconomic variables of the economy
The interest rate of the economy of Australia did not get impacted hugely as was predicted
immediately after the boom hit the country in the year 2003. However, interest rates kept on
increasing steadily since the year 2003 to 2008. Powell, Ryan & Lamb (2017) commented
that this is due to the increased investment demand in the country. However, during the
booms which lasted till the year 2008, it faced a drop in the interest rates due to the global
financial crisis. The wealth of the country and the savings rate increased exponentially
following the mining boom of 2003. Therefore, the interaction in savings market increased
the interest rate a little.
In addition to that, impacts have also been there in case of exchange rates of the country as
well. As discussed above the value of the Australian dollar rose sharply following the mining
boom till the year 2009. According to Pham, Nghiem & Dwyer (2017), the mining boom in
the economy saved the economy of Australia from the adverse effects of the global financial
crisis of 2007. However, aftershock of crisis affected the economy of Australia as well
through the reduction in the interest rates and the exchange rates.

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Figure 2: the interest rate of Australia
(Source: Bashar, 2015)
Application of macroeconomic theories in the event
IS-LM model
IS-LM model of economics determines the equilibrium both in the money and the product
market of the economy. The situation of the Australian economy and its impacts can also be
explained through the model of “Investment savings- Liquidity money” model. As per the
theory of this model, there is a relationship between the interest and the production in the
economy.
Y= C+I+G+(X-M)
Where Y= production
C= consumption
I= Investment
G= Government spending
(X-M) = Net export
Now as the investment demand went up due to the mining boom in the economy of Australia,
the IS curve shifted to the right. That means at any given interest level the output of the
product is now increased. In this case, the increase in the investment is exogenous and hence
the interest rate remains the same in the short run.

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Figure 3: The money market
(Source: Basu et al. 2015)
Again from the perspective of the money market, the boom in the mining industry increased
the income of the people of the country. Additionally, the money supply remained the same
and hence the interest rate in the market went up. However, there were no exogenous changes
in the money market that could shift the LM curve altogether. Therefore, the LM curve
stayed still while the IS curve shifted to the right.
Figure 4: IS-LM model
(Source: Koitsiwe & Adachi, 2015)

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The rightward shift, in this case, was due to the boom in the mining industry of Australia.
Therefore, the new equilibrium at point 1 of figure 4 shows the increase in the interest rates
and the output of the economy of the country. This can also be supported by the empirical
data that was recorded around this time. As per analysis above, the interest rate increased
along with the overall production of the company following the boom in the mining industry.
The GDP of the country started increasing after the year 2003 following the increase in the
investment in the country (Lenzen et al. 2017). The mining boom in Australia made the
economy a safe and attractive place for the global investors. The figure 5 shows and justifies
the theories of IS-LM model as discussed in the study.
Figure 5: The GDP of Australia
(Source: Eaton, 2017)
Response from the side of the government
Fiscal policies of the government
The government immediately responded to the boom in the mining sector thereby increasing
the tax rate. Pham, Nghiem & Dwyer (2017) highlighted that the motive of the government
was to increase the income of the government and make use of the boom in the infrastructure
development of the country. The increased tax rate curbed the purchasing powers of the
consumers of the country. In addition to that, the government also increased their spending in
order to stabilise the economy so that it can distribute the benefits to all the sectors of the
economy ensuring a sustainable and robust growth of the economy of Australia. However,
this action of the government to increase the tax has been extensively criticised stating that
higher disposable income could have continued the after-effects of the mining boom.
Monetary policies of the government
The boom in the mining industry had resulted in a sharp increase in the interest rate.
However, the government through the central bank of the country controlled and kept the

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interest rates low. This is also the reason why, with the sharp increase in the GDP of the
country, the interest rate did not increase. The increased interest rates could have decreased
the liquidity of money at that point that in turn could have been fatal for the economic
transaction and growth of the economy. Apart from that, the money supply was increased
between the year 2003 and 2008 which further controlled the interest rates of the market.
Bashar (2015) highlighted that this step from the side of the government has always been
praised as increased interest rates could have further affected the sectors that were already
facing problem due to the mining boom such as the agriculture sector.
Conclusion
Therefore, mining boom in Australia which happened in the year 2003 is considered as a
significant event for the economy of Australia. It increased the overall output of the country
which in turn helped in tackling the later stages of the global financial crisis of 2007 as well.
This period brought about changes in the component of GDP of the country causing a severe
problem for the agriculture sector. Nevertheless, the overall economy started to perform
better after the boom that the country experienced in the mining sector. However, the after
effects have started to slow down and economists often criticise the fiscal policies of the
government for the short lasting positive impacts of the mining boom.

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Reference
Bashar, O. H. (2015). The Trickle‐down Effect of the Mining Boom in Australia: Fact or
Myth?. Economic Record, 91(S1), 94-108.
Basu, P. K., Hicks, J., Krivokapic-Skoko, B., & Sherley, C. (2015). Mining operations and
corporate social responsibility: A case study of a large gold mine in regional
Australia. The Extractive Industries and Society, 2(3), 531-539.
Dwyer, L., Pham, T., Jago, L., Bailey, G., & Marshall, J. (2016). Modeling the impact of
Australia’s mining boom on tourism: a classic case of Dutch disease. Journal of
Travel Research, 55(2), 233-245.
Eaton, S. (2017). Second Rush: Mining and the Transformation of Australia, The [Book
Review]. Institute of Public Affairs Review: A Quarterly Review of Politics and
Public Affairs, The, 69(2), 60.
Hales, R., & Larkin, I. (2018). Successful action in the public sphere: the case of a
sustainable tourism-led community protest against coal seam gas mining in
Australia. Journal of Sustainable Tourism, 1-15.
Junankar, P. N. (2015). Book review: Ross Garnaut, Dog Days: Australia after the Boom.
Koitsiwe, K., & Adachi, T. (2015). Australia mining boom and Dutch Disease: analysis using
VAR method. Procedia Economics and Finance, 30, 401-408.
Lenzen, M., Geschke, A., Malik, A., Fry, J., Lane, J., Wiedmann, T., ... & Cadogan-Cowper,
A. (2017). New multi-regional input–output databases for Australia–enabling timely
and flexible regional analysis. Economic Systems Research, 29(2), 275-295.
McLennan, C. L. J., Becken, S., & Moyle, B. D. (2017). Framing in a contested space: Media
reporting on tourism and mining in Australia. Current Issues in Tourism, 20(9), 960-
980.
Pham, T. D., Nghiem, S., & Dwyer, L. (2017). The determinants of Chinese visitors to
Australia: A dynamic demand analysis. Tourism Management, 63, 268-276.
Powell, R., Ryan, M., & Lamb, S. (2017). The impact of the mining boom on the dining
industry in Western Australia. Australasian Journal of Regional Studies, 23(2), 243.

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Siva, S. P., Coall, D., Petersen, I., & Quinlivan, J. (2016, October). Anxiety and depression
levels in expectant Fly In, Fly out (FIFO) fathers as the WA mining boom ends.
In AUSTRALIAN & NEW ZEALAND JOURNAL OF OBSTETRICS &
GYNAECOLOGY (Vol. 56, pp. 59-59). 111 RIVER ST, HOBOKEN 07030-5774, NJ
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