Impact of Resources Boom in Australia - Essay Example

?Microeconomics 200 assignment a) Introduction A permutation of substantial worldwide demand and an up change in the iron ore cost curve has pushed the prices to a higher level. These levels of prices are most likely to remain for quiet some time. An all time high of 71.5% boost in prices was registered by iron ore producers in 2005. This increase assisted the producers with the capital required for investments to expand their production capacity so that they could meet the future demand. Since demand is on the rise in industry analysts are estimating long term real prices to be considerably advanced than past prices (Port Jackson Partners Limited, 2006). This is shown in the following figure: Image Courtesy: Port Jackson Partners Limited, 2006 These top prices are backed up by a change in the iron ore cost curve in current years. Following figure proves it. Image Courtesy: Port Jackson Partners Limited, 2006 Australian Producers must take benefit of these high prices of iron ore and demand for the mineral Since Australia is the low cost manufacturer of iron ore exported to China, the operating costs to mine the mineral and transporting the ore to the ports are also low. The substructure and iron ore mining procedures in Australia is world class which has been proved by their position on the cost curve (Port Jackson Partners Limited, 2006) in the following figure: Image Courtesy: Port Jackson Partners Limited, 2006 For the past few years Western Australia has become one of the individual country to produce and export iron ore on a large scale. This has been possible due to the Chinese demand for iron ore [(Adams, (2004); Clements and Greig (1994); Clements et al. (1996); Layman (2004) and Ye (1998)]. The low cost of production has helped Australian manufacturers to be unambiguously placed to captivate chances produced by quick Asian demand growth. On the other hand, reacting promptly to shifts in demand is vital to pulling in the break. Any collapse to react to the market increases the threat that other producer countries, will set up low cost production installations in contest with Australia. The longer the postponement the bigger will be the threat. If Western Australia is to increase its supply of iron ore and reap the benefits of growing profit then it has to optimize its inputs. This can be achieved with the help of various combinations of its inputs. The following figure proves this: Source: Seattle education - Appendix to chapter eight In the above figure isoquant Q1 is for 500 units, Q2 is for 475 units and Q3 is for 400 units. Australia can take advantage of this opportunity The production facility elaborations and capital investments demanded to meet this upsurge in demand are enormous. This will have to be made in a much planned way and should be timely too. If Western Australia wants to hold on to its present contribution of sales, it will require committing in a further 300 million tonnes of yearly production capacity over the subsequent 20 years. The kind of commitment needed to attain this capacity is considerable advances to existent port and rail installations in addition to expansion of new mines and elaborations of existent mine sites. At a conventional standard cost of a$65 per tonne in capital expenses demanded for the extra capacity will amount to roughly a$20 billion in extra capital investments compulsory over the following 20 years (Port Jackson Partners Limited, 2006). Optimization of inputs M and L A firm’s production function represents the means by which the different resources of production can be combined to produce a particular quantity of output. In reality the production function denotes the different combination of raw materials like land; labor etc., to produce the maximum quantity of output for a given period. The state of technology is assumed to be fixed (Rowles, 2011). Let us now look at what happens when the inputs like Machinery (M) and labour (L) are optimized with the help of this figure: Figure: (Rowles, 2011). In the above figure Isoquant I show a variety of combining of inputs L and M to generate a level of output, A1. The incline of the isoquant suggests the technological replace ability of L for M, that is MRTSLM = dPL/dPM. The isoquant curve is tangent to TC/PL – TC/PM lines meaning that when more quantity of output is needed then the input of L and M has to be increased (Rowles, 2011). The marginal rate of technical substitution of labour for capital or capital for labour will be same as the marginal product of labour divided by the marginal product of capital. This will be equal to the absolute value of the isoquant curve. Thus Slope of isoquant = MPL/MPK (Rowles, 2011). b) According to Blinder (2006, p.118) “…Many people blithely assume that the critical labor-market distinction is, and will remain, between highly educated (or highly-skilled) people and less-educated (or less-skilled) people?doctors versus call-center operators…The critical divide in the future may instead be between those types of work that are easily deliverable through a wire (or via wireless connections) with little or no diminution in quality and those that are not…” The iron ore industry has a noteworthy effect upon the economy of the Pilbara, Western Australia and Australia. It gives rise to enormous quantities of iron ore for exportation that are a requirement for contemporary life. In doing so it produces direct and indirect employment opportunities stimulating the local and national economies. With the joblessness rate at historic lows, wage forces have issued in Western Australia. As the Chart below depicts, increase in wages growth in Western Australia has been higher than that of the other States even though wage squeezes are now coming forth in Queensland, while Victoria and NSW have seen comparatively steady wage growth for the past year (A tale of two economies, 2006, 8). Chart showing Wage price index (a) growth (b), major States The mining investing explosion ensuing from the resources flourish produced more job opportunities. Consequently, the rate of joblessness in the State fell down to 4.0% in January 2006 which is by chance the lowest level ever in more than two decades. It is supposed that some job ad in Western Australia can specify simply “applicant must have a pulse” (Caton, 2006). Skills scarcity in Western Australia’s labour market induced heavy inflow of migrators, ensuing in population additions and house price increases in Western Australia while realty markets undermined in the east States. According to Preston (2006), “Prospects for iron ore are as sought after as gold was in the gold rushes or nickel in the nickel boom. Equally, where iron ore was seen as an exclusive club of the big mining houses, it is now being promoted by a whole spectrum of industry players and even those without previous mining interests and certainly with no iron ore experience.” Simultaneously, labour and capital are being ingested by the resource industries, so non-resource industries are confronted with excess labour and capital costs. The heave in iron ore exports and investment will generate roughly 5,550 to 26,400 new jobs in the State, reckoning on whether the flourished iron ore exports are short-lived or will continue (Gregory, 1976). The growth of iron ore exports and new iron ore projects will create significant flow-on gains. It is fascinating to observe that only a minute fraction of new jobs created in the entire economy are to be found in the iron ore industry, while in excess of 80% of the whole number of supplementary jobs are anticipated to be created in other industries, in particular the service industries. This depicts that the economic consequences of the elaboration of iron ore exports and new iron ore projects are very wide (Gregory, 1976). Labour mobility In the long run will ensue in models of net interstate migration changing over to privilege the comparatively resource-dependent States, cutting down inequalities in unemployment rates and wage rates between the States. The supply States would also draw investment from the remainder of the country. Put differently, enduringly advanced commodity prices are probable to have a net positive affect on the dimension of the Australian economy, but transform both the industry work and regional allocation of economic movement (Gregory, 1976). Short-run labour market stability presumes that wage rates and the supplying of labour in each State remain unchanged. This is reliable with the need of extensively established wage squeezes in the Australian economy, and the current deviation in redundancy rates throughout States. On the other hand, there is some proof that total interstate immigration to Western Australia has augmented in the past year, and there are signals of restricted wage squeeze in Western Australia (Gregory, 1976). On the contrary, the more labour concentrated export industries trim down manufacture in the short term, by casting off labour or cutting down their rate of employing. For this reason, national employment is unconstructively involved (Gregory, 1976). Table showing Western Australia Employment shock caused by an iron ore boom for selected years (persons) Ye (2008) prove that the temporary iron ore boom induces decreases in collective employment as soon as the boom ends. The major shock takes place in the year subsequent to the end of the boom. References: 1. A tale of two economies, 2006, the regional impact of Australia’s resources boom Department of Treasury and Finance Discussion Paper, P.8 2. Adams 2004. “Economic Impacts of Alternative Development Proposals for the Argyle Diamond Mine.” 2. Blinder, A. 2006. Offshoring: The next industrial revolution? Foreign Affairs? 85 (2), 113-128. 3. Caton, C. 2006. “Economic Overview.” Economic and Political Overview, CEDA White Paper No. 26: pp. 5-16. 4. Clements, K. W. and R. A. Greig 1994. Modeling Large Resource Development Projects in an Open Economy: The Case of Australia’s North West Shelf Gas Project. Mount Pleasant, MI: The Blackstone Company 5. Clements, K. W, H. Ahammad and Ye Q. 1996. “New Mining and Mineral Processing Projects in Western Australia: Effects on Employment and the Macroeconomy.” Resources Policy 22: 293-346. 6. Gregory, R.G. 1976. “Some Implications of the Growth of the Minerals Sector.” Australian Journal of Agricultural Economics 20: 71-91. 7. Layman, B. 2004. “The Economic and Fiscal Impact of Burrup Peninsula Based Gas-Processing Projects on the Western Australian Economy: A Computable General Equilibrium Analysis.” 8. Preston, B. 2006. “Growth beyond all expectations.” Prospect March-May 2006: 7-8. Perth: DoIR. 9. Port Jackson Partners Limited 2006, Economic Evaluation of the Impact of Lost Iron Ore Production and Share 10. Thomas Reginald Rowles, 2011 Development of concepts of capital and income in financial reporting in the nineteenth Century, Pp.79-82 11. Ye, Q. 2008. Commodity booms and their impacts on the Western Australian economy: The iron ore case. Resources Policy, 33, 83-101. 12. Ye, Q. 1998. The Economic Significance of New Minerals Projects in Western Australia. PhD Thesis, Nedlands: Economic Research Centre, Department of Economics, The University of Western Australia. pp. i-xiii, 1-376. Read More