simple messages seem to me to be important. first, we should not assume that the recent pace of national income growth is a good estimate of the likely sustainable pace. we should allow a good deal of the income growth to flow into saving in the near term. we can always consume some of that income later if income stays high, but it is harder to cut back absorption that rises in anticipation of income gains that do not materialise. to date, that precautionary approach seems to be in place. households are saving more than for some years and the much - discussed “ consumer caution ” has been in evidence. firms are consolidating balance sheets. governments have reiterated commitments to stated medium - term fiscal goals. second, there is going to be a non - trivial degree of structural change in the economy as a result of the large change in relative prices. this is already occurring, but if relative prices i note that prices observed over the past year have exceeded, more or less continually, what had been assumed. bis central bankers ’ speeches stay anywhere near their current configuration surely there will be a good deal more such change in the future. because we can ’ t confidently forecast where relative prices will settle, we cannot know how much such change is “ optimal ”. therefore we can ’ t be sure that some of it will not need to be reversed at some point. but the optimal amount of change is unlikely to be none at all. so we should not look to prevent change ; we should look to make it cost as little as possible. in general, that means preserving flexibility and supporting adaptation. third, productivity is going to come back into focus, especially in sectors that are exposed to the rise in the exchange rate. their prices will be squeezed, and their costs potentially pushed up by the demand of the resources sector and related industries for labour. surely maintaining viability will involve achieving significantly bigger improvements to productivity than we have observed in recent years. fourth, if we have to face structural adjustment, it is infinitely preferable to be doing it during a period in which overall income is rising strongly. if nothing else, in such an environment the gainers can compensate the losers more easily. many other countries face major issues of economic adjustment in an environment of overall weakness. conclusion at the risk of sounding like a broken record, the rise in australia ’ s terms of trade over the past five years is the biggest such event in a very long time. it reflects powerful forces at work in the

ore each day ; now it is over a million tonnes a day. coal shipments have been running at a rate of around 300 million tonnes a year, at least until the recent floods. australian capacity to export lng is now around 20 million tonnes a year, up from around half that in 2004. this looks like it will increase to over 50 million tonnes within five years. the rise in demand has been driven in large part by the rapid growth of key emerging market economies such as china and india. over the past decade : the average annual growth of gdp per capita has been around 5½ per cent in india and almost 10 per cent in china ; the number of people living in cities in those two countries, especially china, has risen by over 250 million, which implies having to expand or create cities ( with the attendant buildings and infrastructure ) to house the entire population of australia more than 10 times over or, alternatively, to house the populations of france, germany and japan combined ; and steel production has doubled in india and it has more than quintupled in china. thus far, the demand for resources has stretched the global capacity of suppliers. prices of key raw materials have consequently been driven upwards. as a result australia ’ s terms of trade have risen sharply, to be about 65 per cent above the 20th century average level, and about 85 per cent above the level that would be expected had the downward trend observed over the 20th century continued. even assuming the terms of trade soon peak and decline somewhat, they are nonetheless, over a five - year period, at their highest since at least federation – by a good margin. with the terms of trade at their current level, australia ’ s nominal gdp is about 13 per cent higher, all other things equal, than it would have been had the terms of trade been at their 100 - year average level. of course australia has substantial foreign ownership in the resources sector so a good proportion of this income accrues to foreign investors. nonetheless, probably about half of that additional 13 per cent of gdp accrues to australians one way or another. we also know that a large expansion in the resource sector ’ s capacity to supply commodities is being planned. already, mining sector capital investment has risen from an average of around 2 per cent of gdp over the past 25 years to about 4 per cent, which exceeds the peak reached in the booms of the late 1960s and early 1980s. given the scale of possible additional investment projects that have been mooted