Mining and resource-related capital investment represents a substantial and highly volatile component of Australian GDP, historically accounting for around 8% of economic output. Following a period of major expansion in liquefied natural gas (LNG) and iron ore projects between 2016 and 2022, resource sector investment is projected to contract sharply in 2027 due to falling global commodity prices and stricter environmental regulations.
This capital expenditure is vital for Australia's macroeconomic performance. On the demand side, it forms a key component of aggregate demand, driving regional employment and generating substantial sub-contracting opportunities. On the supply side, these massive infrastructure projects expand the nation's capital stock and export capacity, shifting the long-run aggregate supply (LRAS) curve outwards and enhancing labor productivity.
However, during peak construction phases, intense competition for skilled labor and materials has historically led to localized wage spikes, capacity bottlenecks, and a deterioration in the current account balance as heavy machinery is imported.
Extract D indicates that resource sector investment is 'projected to contract sharply in 2027'.
Assess the macroeconomic consequences for the Australian economy of a significant reduction in capital investment in its resource sector.
222 exam-style questions on AQA A Level Economics 2.2 How the macroeconomy works: the circular flow of income, aggregate demand/aggregate supply analysis and related concepts, covering 2.2.1 The circular flow of income, 2.2.2 Aggregate demand and aggregate supply analysis, 2.2.3 The determinants of aggregate demand, 2.2.4 Aggregate demand and the level of economic activity, 2.2.5 Determinants of short-run aggregate supply, and 2.2.6 Determinants of long-run aggregate supply. Each one has a worked solution and a mark scheme showing where the marks go.