Question

Consider the following two quotes:

1. In Australia, the story has been quite different. Investment spending here has been at a historically high level over much of the past decade. This has been primarily due to the strength of investment in the resources sector, which reached its highest share of activity in more than a century. So, unlike in other countries, there has been a significant addition to the capital stock in Australia over the past decade. We are seeing the fruits of that investment in the strong growth in resource exports.

2. The Australian of Bureau of Statistics (ABS) reported that the strong trend growth in employment has continued. Monthly trend full-time employment increased for the 14th straight month in November 2017. Full-time employment grew by a further 15,000 persons in November, while part-time employment increased by 7,000 persons, underpinning a total increase in employment of 22,000 persons. "Full-time employment has now increased by around 308,000 persons since November 2016, and makes up the majority of the 371,000 net increase in employment over the period," the Chief Economist for the ABS, Bruce Hockman, said. Over the past year, trend employment increased by 3.1 per cent, which is above the average year-on-year growth over the past 20 years (1.9 per cent). The trend monthly hours worked increased by 3.8 million hours (0.2 per cent), with the annual figure also reflecting strong growth (3.4 per cent). The labour force participation rate increased to 65.4 per cent, the highest it has been since October 2011. The female labour force participation also increased, to a further historical high of 60.1 per cent.

Using the Keynesian 45-degree diagram, explain the short-run macroeconomic implications of the increase in investment spending in Australia and how it impacted on the unemployment rate. Please address the following in your answer:

1. Starting from an initial equilibrium point what is the effect of investment on output and unemployment

2. Provide a detailed explanation of the transition process involved in moving from an initial equilibrium to a new equilibrium

3. The relevance of Okun’s law

4. In his speech Guy Debelle stresses that most of the increase in investment came from the mining sector due to ‘animal spirits’. Explain why investment in nonmining sector was weak. What are the future implications if the mining boom would come to an end?

Answer 1

1. The effect of investment on output & unemployment:

Output: Due to the increasing investment output has increased significantly leading to a strong growth in resource exports.

Unemployment: Unemployment has decreased due to significant increase in labour force participation rate.

4. Guy Debelle stresses that most of the increase in investment came from the mining sector due to ‘animal spirits’. It indicates the firm’s expectations of future demand. Mining investment was strong because expectations for future demand were high and there wasn’t much uncertainty around expectations. It gained momentum due to the large rise in commodity prices.

Investment in non-mining sector was weak due to weak aggregate demand. Investment in the non-mining sector in Australia has been weak, the most powerful reason behind this is a firms' expectations of future demand, also known as animal spirits. Mining investment was strong because expectations for future demand were high and there wasn't that much uncertainty around that expectation. Expectations of demand elsewhere have not been strong. if the mining boom would come to an end it will result in reduction of output & significant rise in unemployment.