No. 3 - Department of Treasury - The Western Australian Government

2006 No.3 Western Australian Economic SummaryFigure 41INDUSTRIAL COMMODITY PRICES, 1862 TO 1999"The Economist" Index, 1845-50 = 100700Nominal IndexReal Price Index1406001205001004008030060200401002001860 1880 1900 1920 1940 1960 1980 2000Nominal Price Index (LHS)Real Price Index (RHS)Source: Cashin, P. and C.J. McDermott (2002), "The Long-Run Behavior of Commodity Prices: SmallTrends and Big Variability", IMF Staff Papers, Vol. 49, pp. 175-990The long-term decline in commodity prices relative to other goods andservices is sometimes presented as a reason for governments to try to reducetheir economies’ reliance on primary industries. Primary production ispresented as an accelerating treadmill, on which ever-increasing volumes ofoutput are needed to secure a static standard of living.However, this representation is misleading if relatively high productivitygrowth is the cause of falling relative price growth. Far from being a sourceof ever-increasing economic pressure, falling relative prices could be betterinterpreted as evidence of relative economic success.The long-term decline in relative mining output prices has reversedspectacularly with the growth in commodity prices since 1999-00. Themining industry’s output price and productivity trends have also shiftedsharply relative to other sectors. From being a high productivity low pricegrowth sector up to the late 1990s (Figure 40b), in recent years mining hasrecorded a significant decline in productivity, and output price growth thatis well above average (Figure 40c) 1 .These recent trends raise two key questions - what do the recent changes inrelative prices mean for the economic well-being of Western Australians,and how is the current cycle of commodity prices, output and productivitychanges likely to unfold in future?1 It is notable that the utilities (electricity, gas and water) have also moved fromhigh-productivity low-price growth to the opposite in the same period. There may be alink here – for example, in the effect of higher coal, oil and gas prices on electricityand retail gas prices.Department of Treasury and Finance 63