Export prices, terms of trade, real exchange rate and structural changes in the Australian economy

Abstract

Australia has long been considered a commodity-based economy, with reliance on a few primary export commodities a key reason. Structural change in the economy since the mid-1980s has seen a growing role of the traded sector within the Australian economy, with expansion in both the export and import sector. A sustained price-led boom from 2003 to 2008 in Australian export commodities has triggered discussion around the Gregory thesis and wider Dutch Disease theory. This thesis examines the impact of the price-led boom and the longer-term structural change on the Australian economy, manufacturing sector (at an aggregate and disaggregate level), and the real exchange rate. The key conclusions are: (i) that the aggregate manufacturing sector was impacted by the mineral export-price boom, although not as expected; (ii) at a disaggregate level there are differences in how the boom impacted each manufacturing sub-sector; (iii) underlying structural change in the Australian economy and OECD manufacturing remains an important influence on Australian manufacturing; and, (iv) despite these structural changes, the underlying co-integrated relationship between the terms of trade and real exchange rate is largely unchanged. The role of underlying structural change within the economy is an important consideration for policy makers and future research opportunities.