BUSINESS MACROECONOMICS ASSIGNMENT 2012 QUESTION ONE Australia’s economy is currently described as a “multi-speed” economy. Critically discuss this. [HINT: In your discussion include what has caused...

Ques 1:
Australia is the 13th largest economy in the world with nominal GDP of $1.6 trillion and 17th largest according to GDP (PPP). It is a resource rich economy, with abundant reserves of natural resources- uranium, iron ore, natural gas, copper, renewable natural resources and coal. The economy initially started with its focus on the production of primary products but is currently dominated by service sector with contribution in domestic income by more than 50%. It has seen a rise in share of services and mining. It is truly services led economy today. The share of services is 70%, although mining, agriculture and manufacturing sector contribute significantly to its growth.
It is the fastest growing nation among developed nations in 2011 and has been growing at the fastest rate among OECD members in 1990s. It is expected to do well in the future based on the rising demand for natural resources from emerging nations like China. Strong exports are expected to sustain the growth rates in Australia. Australia operates as a supplier of resources in the world and therefore is immune to any economic turmoil which occurs globally. The performance of Australian business especially SMEs have been quite good and optimistic since the end of 2009 financial crisis.
But this growth has not been without any pain. Experts point out at the ‘multi-speed’ nature of the Aun economy. This hints at the unequal growth rates among different sectors of the economy. In recent times the mining sector has zipped past in growth while manufacturing and construction remains laggards. The rising exports have strengthened the Australian dollar to the disadvantage of manufacturing sector which is no longer cost competitive. This unequal growth is referred to as the ‘multi-speed’ economy of Australia, where different sectors grow at different speeds. Some says that Australian economy is three-speed economy while some says it is 2-speed economy but the fact accepted by all is that it is a multispeed economy. There are two main reasons for this:
One is the recent boom in mining, which is spurred by rising demand from China. This has caused the mining sector to grow exponentially, while others lag behind. The mining sector has been the most prominent and highly growth intensive sector of the economy ever since investment entered this sector due to its large resource base. The sector has been employing or pulling more resources than others. On the other hand if we consider other sectors (non-mining sector) of the economy, the productivity has been moderating and the growth rate is quite low. One of the reasons for this below average performance in non-mining sector is the slowdown in world economy which shows the vulnerability of Australian economy to global crisis.
Two, the geographical spread and uneven distribution of natural resources divides Au into different regions that are economically diverse. The resource-rich Western Australia stands out with high economic growth rates based on its natural endowments of minerals. In addition, the labor productivity is different across region and this is often cited as the reason behind having different growth rates across sectors.
It is not very advantageous to have multi-speed economy. Difference in growth is not good for the long term growth of an economy. It leads to concentration of wealth in the hands of few and leads to increase in income inequality across sectors by widening the income gap between different sectors. It also makes it difficult to formulate a single uniform monetary policy for the entire economy. The equity principle requires equity in terms of resource allocation but the growth differential will allow booming sector to exploit more resources than other sectors and thereby violating the equity principle. The government can play a crucial role here. It needs to focus more on sectors which are lagging behind so that they can be encouraged to grow at par with dominant sector. Mining sector is the dominant sector and has/has been dominating sectors like real estate, tourism, retail markets and entertainment etc. it is expected to do well in the future-for the period 2011-2016, the iron ore production in Australia is expected to grow by 8.26%, with the production of iron core rising from 465 million tons in 2011 to 706.9 million tons in 2016. The coal production output is also expected to grow by 6.5% over this forecast period, with production increasing from 405mtpa in 2011 to 561mtpa in 2016.
Recent moves to tax the sectors like oil and gas with the MRRT is welcome, especially since the tax proceeds...