The Benefits of the Boom revisited: A response to John Edwards

In Beyond the Boom, John Edwards (2014) advances three main propositions about the boom in Australia’s terms of trade (driven by mineral export prices) in the decade to 2011-12: 

  1. Size: The benefit to Australians was not anywhere as large as claimed by most commentators.
  2. Waste: Australia did not waste the benefits.
  3. Adjustment: Therefore, it should not be a great problem for Australian households and governments to adjust to the subsequent fall in the terms of trade. 

Edwards puts the size of the benefits of the huge rise in mineral export prices from 2003-04 to 2011-12 at around 3 per cent of Gross Domestic Product (GDP). Others (including senior staff from the Reserve Bank of Australia and Treasury, as well as respected economists in universities, government, business and the media) have asserted that the benefits were far greater. On this basis, many commentators believe that Australia is facing a significant task of adjustment to lower terms of trade. 

Table 1 reports four estimates of the national gain from the boom. Edwards’ 3 per cent is by far the smallest. His approach is informal and intuitive. It consists in apportioning, between Australians and foreigners, the observed rises in mining output, mining value-added or mining exports. All give the same result. However, his intuition led him astray. 

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