TERMS OF TRADE SHOCKS AND MACROECONOMIC ADJUSTMENT IN A RESOURCE EXPORTING ECONOMY - THE CASE OF AUSTRALIA

The paper is concerned with analysing, from a theoretical perspective, the macroeconomic consequences arising from terms of trade shocks for a resource producing and exporting economy, with emphasis placed upon the Australian experience. The paper conducts a brief overview of macroeconomic developments in Australia during the 1980s, and links these to developments in its terms of trade. A simple deterministic macroeconomic model is then developed and utilized to identify potential macroeconomic changes, through the use of a numerical simulation procedure, arising from terms of trade shocks, which are then compared with actual developments. This procedure suggests that the theoretical framework can shed some important light on the actual macroeconomic adjustments which have arisen.