Research 350 - NZ Transport Agency

2. APPROACHES TO ASSESSING NATIONAL ECONOMIC BENEFITS
generally better able to deal with economic interactions and represent a more sophisticated
modelling approach then is the case with I-O analysis.
CGE models utilise extensive quantitative information relating to detailed commodity flows,
labour market data, and national accounts data. The economy is presented by CGE models as
a system of flows of goods and services between sectors. Goods and services include
produced commodities and primary factor services (labour, land, capital). The sectors include
the household sector, several industry sectors, government and the foreign sector. An I-O
table is used to represent flows between sectors.
Commodity flows might include flows from industries to households, governments, export
markets and investment; flows of commodities from industries to other industries for use in
current production (intermediate usage); imports of commodities from abroad to meet
domestic demand, and flows of primary factor services from households to industries. The
theoretical structure and overall accounting framework are therefore calibrated to actual
conditions in a particular year. Responses within the model to changes in economic
conditions are determined by parameters. The values of the parameters are estimated from
actual economic data (Dwyer, Forsyth, Spurr & Ho, 2004, p. 9).
As indicated, a key disguising feature of CGE models is their ability to incorporate constraints
(i.e. behavioural assumptions) into modelling. These behavioural assumptions indicate how
linked sectors respond to ‘shocks’ and how these shocks are transmitted to other sectors.
Unlike I-O models, CGE models make specific assumptions about the behaviour of
consumers, producers and investors, and, in particular, the extent to which the supply of
factors of production can be increased (i.e. resource constraints).
Explicit assumptions can also be made about government policy settings using CGE
modelling. They could allow for the fact that if governments spend (to raise money for
infrastructure works, for example) they may need to raise taxes, meaning that consumers
and firms would spend less – with consequent economic effects. Allowance can also be made
for linkages to the rest of the world in relation to the foreign exchange market – e.g. when
demand for exports increases, the exchange rate rises, discouraging exports and
encouraging imports (Dwyer, Forsyth, Spurr & Ho 2004, pp. 9-10).
Dwyer, Forsyth, Spurr and Ho (2004, p. 8) illustrate the differences between I-O analysis and
CGE modelling, and the importance of incorporating resource constraints, by reference to the
case of Australia’s resources boom of the early 1970’s. I-O analysis would have suggested
that Australia’s manufacturing industry would be boosted by orders from the growing mining
industry. However, this would not allow for the fact that the resources boom led to a major
appreciation of the Australian dollar. This, in turn, resulted in a contraction of manufacturing
due to its loss of competitiveness as an import-competing industry. In contrast, CGE
modelling could have allowed for these impacts.
Thus, unlike I-O analysis, the results of CGE analysis are not a predictable increase in output
stimulated by an initial increase in activity – more realism is added into the process.
CGE model outputs may include a range of macroeconomic variables such as GDP/GSP
employment, imports and exports, taxes, government spending and budget surplus, as well
as output results for individual industries.
The distinction between outputs from CGE modelling and those from SCBA largely mirror
those discussed above for I-O modelling. Like I-O modelling, CGE modelling measures
economic impacts rather than economic efficiency or net benefits (as measured by SCBA).
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