The Relationship Between Commodity Prices and Australia’s Gross Domestic Income

Abstract

Commodities dominate Australia’s export composition. To this effect, there is a plausible relationship between commodity prices and the prosperity of Australians. Gross domestic income is chosen as a proxy for prosperity given it is better able to capture purchasing power than gross domestic product in the Australian context. Using a discrete wavelet transformation, the commodity price series is decomposed into a trend and cycle component. Following, I run a series of structural vector autoregressions for the period 1985:Q4 to 2019:Q4, as well as two sub-samples, pre and post mid-2003, in view of the increase in price and variance of commodity prices at this time. I find that both the trend and cycle components of commodity prices meaningfully impact GDI primarily via gross operating surplus, while GDP is unaffected. Although a shock to the cycle component of the commodity price series has a larger effect on GDI when compared to the trend, the impact of the trend is far more persistent. Further, for the pre mid-2003 sub-sample, commodity price changes have no discernable impact on GDI, as opposed to the post mid-2003 sample where a noticeably strong relationship exists.