Question:

Review Essay Task
Part A: Summary in your OWN words of the article I have chosen to review.

WRITE AT LEAST 800 WORDS, BUT NOT EXCEEDING 850 WORDS

Part B: Evaluation and Appraisal of the  selected article.

WRITE AT LEAST 800 WORDS, BUT NOT EXCEEDING 850 WORDS

The selected article is:

Connolly, E, & Orsmond, D, 2011, The Mining Industry: From Bust To Boom, Research Discussion Paper, Economic Analysis Department, Reserve Bank of Australia.

Answer:

Title: A23 Economics

Part A: Summary of the article

This article, titled The Mining Industry: From Bust To Boom, discusses the Australian mining industry, particularly in respect of the remarkable turnaround that the industry experienced during the 2000s. This turnaround is discussed in the context of trends in global commodity prices, demand, and supply. The role that the emerging Asian economies played in driving demand high resulting in high prices of commodities used in the production of steel and energy is explored. The authors point out that the resulting increase in demand was so high that supply could not immediately catch up, leading to a remarkable increase in prices.

Connolly & Orsmond (2011) discuss the Australian boom in the production of bulk commodities that occurred in the 2000s. This boom was characterized by a decline in the use of oil and subsequent rise in the production and use of liquefied natural gas (LNG). The boom, according to the article, also saw a significant rise in a rise in prices of steel and other metals, including gold, lead, copper, zinc, bauxite, and nickel. The rise in prices, in return, caused many investors to direct their factors of production into the mining industry.

The effect of the mining industry on the broader economy is also discussed in great detail in the article. Towards the end of the decade, the mining industry started contributing to a larger share of Australia’s national economy. This contribution was heavily felt in the manner in which the country’s real exchange rate recorded a dramatic increase, thereby impacting on all the country’s trade-exposed industries.

The impact that the mining boom had in the context of the broader economy is discussed from a theoretical perspective. The Heckscher-Ohlin-Samuelson framework is used to analyze the rise in the global prices of commodities, tradables, as well as non-tradables.  In this regard, a global rise in commodity prices is seen to have an income and factor transfer effect.

The income effect, on the other hand, is a reflection of the changes that occur in the output of various industries through increased of earnings made through high export prices. Other than the payments made for all the inputs used, receipts from the mining industry are distributed as loyalty payments and tax to the state and federal governments. The receipts also boost the income and by extension wealth of the country’s resident shareholders through higher equity prices and dividend payments.  In this regard, the demand for other tradables as well as non-tradables increases to the extent that the income gained is spent and not saved.

Based on the assumption that the economy is experiencing full employment, the indication is that the factor transfer effect is a reflection of the movement of labor as well as other factors of production towards the mining industry and its various intermediate inputs, for example exploration services and mining equipment. Inputs are taken away from all production activities that target other tradable, for example education, non-mining manufacturing, and tourism. The inputs are also taken away from various non-tradables, including services such as dwelling construction, healthcare, and childcare. This trend has been in response to the rise in commodity prices and the accompanying increase in mining industry profits.

However, Connolly & Orsmond (2011) argue that in practice, the task of tracking the full magnitude of Australia’s mining boom on the structure of the economy remains challenging. One of the reasons given for this difficulty is that the expansion of this industry during the 2000s took place simultaneously with other significant economic developments, for example, changes in the spending behavior of households and a slowing pace of growth in productivity.

Nonetheless, it is suggested that it is possible for a general view of the impact that the recent changes have had throughout the economy to be determined through a calculation of structural change indices. In the article, focus is on an assessment of changes that have occurred in the share contributed by different industries to the real output, total nominal output, nominal investment, and employment.

The effects exerted on the national economy by the mining industry are evaluated through reference to rise in employment, intermediate input costs, the amount of taxes and royalty payments made throughout the 2000s. The same indications are made with regard to the increase in retained earnings and dividends. In each of these aspects, it is indicated that the effects of the boom in the mining industry on the national economy both directly and indirectly.

Connolly & Orsmond (2011) underscore the differences that exist with regard to the distribution of resources across the country, whereby the highest concentration of resources is in Western Australia, Northern Territory, and Queensland. Structural change index, according to the article, shows that state variation continued to increase in economic indicators throughout the 2000s.

From a global-economy perspective, the article points out to the impact being exerted by China on the Australian economy. As countries such as China continue to push the demand for energy up, Australia’s mining industry continues to experience a boom, leading to increased mining investments, particularly in coal, iron ore, and LNG.

Part B: Evaluation and Appraisal of the article

In this article, Connolly & Orsmond (2011) explore into the issue of boom in Australian mining industry in the 2000s in great detail. In the discussion of this issue, the article appears to have strengths in certain respects and weaknesses in others. One of the main strengths is that the authors discuss the boom in terms of a wide range of internal and external factors. The main external factor is the influence of emerging Asian economies lead by China. These economies are observed to have caused a demand that is higher than previously anticipated. The supply failed to catch up with the rising demand, leading to a rise in prices in countries such as Australia and channeling of more resources into the mining industry.

Within Australia, different aspects of the boom have been expounded on in efforts to understand the changing growth trends in the country’s mining industry throughout the 2000s. First, the article also goes into great detail regarding the decline oil production and the recent rise in the production of LNG in Australia. The context in which the decline in oil production occurred is well explained just in the same way as the context in which the increased production of LNG occurred during the 2000s. There are specific details regarding the trends in oil and LNG production. For example, it is indicated that oil production in Australia peaked in 2000 and since then, it has fallen by 40 per cent. Regarding LNG, it is indicated that production has more than doubled since 2000.

Such detailed descriptions are also provided with regard to the way the boom manifested itself in metals manufacturing. The authors provide a clear and precise description and analysis of the metals manufacturing sector since the end of the changing trends in metals manufacturing since the start of the Asian financial crisis of the 1990s.

One of the main weaknesses relates to the theoretical explanation of the mining boom. Connolly & Orsmond (2011) hint at the relevance of traditional trade theories in explaining how an economy may evolve following a rapid increase in prices of a major export. However, only one of these theories is expounded on: the Heckscher-Ohlin-Samuelson theory. There is no mention of the other traditional trade theories.

In the Heckscher-Ohlin-Samuelson theory, the explanation offered is hinged on the assumption that the economy is operating at full employment. This is an impractical assumption since it is almost impossible for full employment to be achieved at the national level. Similarly, the ‘income effect’ as explained in the theory assumed that income gains are all spent and nothing is saved. This assumption is inappropriate as a basis of analysis since it is not possible for households to spend all their monthly incomes without saving anything. Similarly, it is not right for the authors to assume that all the country’s tradable prices are set at global prices. By and large, most of the trade that takes place across national borders is governed by the free-market philosophy.

Moreover the article fails to make a significant contribution to the goal of tracking the magnitude of the effects of the mining boom on the structure of the Australian economy in its entirety. The reason given for this shortcoming is that the expansion of the Australian mining industry throughout the 2000s occurred at the same time as many other key developments. Instead, the author adopts a piecemeal approach, whereby different explanations are offered regarding impact of the growth in the industry at the state level and at the national level.

The article also appears to offer an imbalanced overview of the mining industry boom by focusing too much on the way mining sales receipts were directly distributed over the decade. In this regard, the authors also put too much attention on the impact this direct distribution of the sales receipts on economic activity and incomes across the broader national economy. This imbalance may be traced back to the assumption that all the incomes obtained are spent and nothing is saved.

The imbalance in this analysis also extends with regard to the direct and indirect contributions to the Australian economy. Too much emphasis is on the direct contribution and little attention is focused on indirect impact of the mining boom. In this regard, the direct contributions discussed include direct labor costs, increased demand in the mining industry, and royalty and tax payments. Other direct contributions discussed include intermediate input use in the mining industry, investments, and retained earnings and dividends.

Moreover, the theoretical assumptions made with reference to the Heckscher-Ohlin-Samuelson framework are used only with reference to the direct contribution of the boom to Australia’s economy. This creates an imbalance, whereby the discussion on indirect effects is not hinged on any theoretical framework. Consequently, the arguments made with regard to the indirect impact of the mining boom appear weak. Nonetheless, in conclusion, the authors made a significant contribution on the role of the mining boom to Australia’s macroeconomic performance throughout the 2000s.

 

References

Connolly, E, & Orsmond, D, 2011, The Mining Industry: From Bust To Boom, Research Discussion Paper, Economic Analysis Department, Reserve Bank of Australia.

 

 

 

 

 

 

 

Title: A23 Economics

 

Part A: Summary of the article

This article, titled The Mining Industry: From Bust To Boom, discusses the Australian mining industry, particularly in respect of the remarkable turnaround that the industry experienced during the 2000s. This turnaround is discussed in the context of trends in global commodity prices, demand, and supply. The role that the emerging Asian economies played in driving demand high resulting in high prices of commodities used in the production of steel and energy is explored. The authors point out that the resulting increase in demand was so high that supply could not immediately catch up, leading to a remarkable increase in prices.

Connolly & Orsmond (2011) discuss the Australian boom in the production of bulk commodities that occurred in the 2000s. This boom was characterized by a decline in the use of oil and subsequent rise in the production and use of liquefied natural gas (LNG). The boom, according to the article, also saw a significant rise in a rise in prices of steel and other metals, including gold, lead, copper, zinc, bauxite, and nickel. The rise in prices, in return, caused many investors to direct their factors of production into the mining industry.

The effect of the mining industry on the broader economy is also discussed in great detail in the article. Towards the end of the decade, the mining industry started contributing to a larger share of Australia’s national economy. This contribution was heavily felt in the manner in which the country’s real exchange rate recorded a dramatic increase, thereby impacting on all the country’s trade-exposed industries.

The impact that the mining boom had in the context of the broader economy is discussed from a theoretical perspective. The Heckscher-Ohlin-Samuelson framework is used to analyze the rise in the global prices of commodities, tradables, as well as non-tradables.  In this regard, a global rise in commodity prices is seen to have an income and factor transfer effect.

The income effect, on the other hand, is a reflection of the changes that occur in the output of various industries through increased of earnings made through high export prices. Other than the payments made for all the inputs used, receipts from the mining industry are distributed as loyalty payments and tax to the state and federal governments. The receipts also boost the income and by extension wealth of the country’s resident shareholders through higher equity prices and dividend payments.  In this regard, the demand for other tradables as well as non-tradables increases to the extent that the income gained is spent and not saved.

Based on the assumption that the economy is experiencing full employment, the indication is that the factor transfer effect is a reflection of the movement of labor as well as other factors of production towards the mining industry and its various intermediate inputs, for example exploration services and mining equipment. Inputs are taken away from all production activities that target other tradable, for example education, non-mining manufacturing, and tourism. The inputs are also taken away from various non-tradables, including services such as dwelling construction, healthcare, and childcare. This trend has been in response to the rise in commodity prices and the accompanying increase in mining industry profits.

However, Connolly & Orsmond (2011) argue that in practice, the task of tracking the full magnitude of Australia’s mining boom on the structure of the economy remains challenging. One of the reasons given for this difficulty is that the expansion of this industry during the 2000s took place simultaneously with other significant economic developments, for example, changes in the spending behavior of households and a slowing pace of growth in productivity.

Nonetheless, it is suggested that it is possible for a general view of the impact that the recent changes have had throughout the economy to be determined through a calculation of structural change indices. In the article, focus is on an assessment of changes that have occurred in the share contributed by different industries to the real output, total nominal output, nominal investment, and employment.

The effects exerted on the national economy by the mining industry are evaluated through reference to rise in employment, intermediate input costs, the amount of taxes and royalty payments made throughout the 2000s. The same indications are made with regard to the increase in retained earnings and dividends. In each of these aspects, it is indicated that the effects of the boom in the mining industry on the national economy both directly and indirectly.

Connolly & Orsmond (2011) underscore the differences that exist with regard to the distribution of resources across the country, whereby the highest concentration of resources is in Western Australia, Northern Territory, and Queensland. Structural change index, according to the article, shows that state variation continued to increase in economic indicators throughout the 2000s.

From a global-economy perspective, the article points out to the impact being exerted by China on the Australian economy. As countries such as China continue to push the demand for energy up, Australia’s mining industry continues to experience a boom, leading to increased mining investments, particularly in coal, iron ore, and LNG.

Part B: Evaluation and Appraisal of the article

In this article, Connolly & Orsmond (2011) explore into the issue of boom in Australian mining industry in the 2000s in great detail. In the discussion of this issue, the article appears to have strengths in certain respects and weaknesses in others. One of the main strengths is that the authors discuss the boom in terms of a wide range of internal and external factors. The main external factor is the influence of emerging Asian economies lead by China. These economies are observed to have caused a demand that is higher than previously anticipated. The supply failed to catch up with the rising demand, leading to a rise in prices in countries such as Australia and channeling of more resources into the mining industry.

Within Australia, different aspects of the boom have been expounded on in efforts to understand the changing growth trends in the country’s mining industry throughout the 2000s. First, the article also goes into great detail regarding the decline oil production and the recent rise in the production of LNG in Australia. The context in which the decline in oil production occurred is well explained just in the same way as the context in which the increased production of LNG occurred during the 2000s. There are specific details regarding the trends in oil and LNG production. For example, it is indicated that oil production in Australia peaked in 2000 and since then, it has fallen by 40 per cent. Regarding LNG, it is indicated that production has more than doubled since 2000.

Such detailed descriptions are also provided with regard to the way the boom manifested itself in metals manufacturing. The authors provide a clear and precise description and analysis of the metals manufacturing sector since the end of the changing trends in metals manufacturing since the start of the Asian financial crisis of the 1990s.

One of the main weaknesses relates to the theoretical explanation of the mining boom. Connolly & Orsmond (2011) hint at the relevance of traditional trade theories in explaining how an economy may evolve following a rapid increase in prices of a major export. However, only one of these theories is expounded on: the Heckscher-Ohlin-Samuelson theory. There is no mention of the other traditional trade theories.

In the Heckscher-Ohlin-Samuelson theory, the explanation offered is hinged on the assumption that the economy is operating at full employment. This is an impractical assumption since it is almost impossible for full employment to be achieved at the national level. Similarly, the ‘income effect’ as explained in the theory assumed that income gains are all spent and nothing is saved. This assumption is inappropriate as a basis of analysis since it is not possible for households to spend all their monthly incomes without saving anything. Similarly, it is not right for the authors to assume that all the country’s tradable prices are set at global prices. By and large, most of the trade that takes place across national borders is governed by the free-market philosophy.

Moreover the article fails to make a significant contribution to the goal of tracking the magnitude of the effects of the mining boom on the structure of the Australian economy in its entirety. The reason given for this shortcoming is that the expansion of the Australian mining industry throughout the 2000s occurred at the same time as many other key developments. Instead, the author adopts a piecemeal approach, whereby different explanations are offered regarding impact of the growth in the industry at the state level and at the national level.

The article also appears to offer an imbalanced overview of the mining industry boom by focusing too much on the way mining sales receipts were directly distributed over the decade. In this regard, the authors also put too much attention on the impact this direct distribution of the sales receipts on economic activity and incomes across the broader national economy. This imbalance may be traced back to the assumption that all the incomes obtained are spent and nothing is saved.

The imbalance in this analysis also extends with regard to the direct and indirect contributions to the Australian economy. Too much emphasis is on the direct contribution and little attention is focused on indirect impact of the mining boom. In this regard, the direct contributions discussed include direct labor costs, increased demand in the mining industry, and royalty and tax payments. Other direct contributions discussed include intermediate input use in the mining industry, investments, and retained earnings and dividends.

Moreover, the theoretical assumptions made with reference to the Heckscher-Ohlin-Samuelson framework are used only with reference to the direct contribution of the boom to Australia’s economy. This creates an imbalance, whereby the discussion on indirect effects is not hinged on any theoretical framework. Consequently, the arguments made with regard to the indirect impact of the mining boom appear weak. Nonetheless, in conclusion, the authors made a significant contribution on the role of the mining boom to Australia’s macroeconomic performance throughout the 2000s.

 

References

Connolly, E, & Orsmond, D, 2011, The Mining Industry: From Bust To Boom, Research Discussion Paper, Economic Analysis Department, Reserve Bank of Australia.