Research 350 - NZ Transport Agency

2. APPROACHES TO ASSESSING NATIONAL ECONOMIC BENEFITS
the exclusion of externalities from macro-economic analysis makes it difficult to compare
with SCBA (while their inclusion would necessitate yet more assumptions).
2.6.2.3 Using GDP as a proxy for SCBA outputs
Apart from such estimation issues, similar issues to those mentioned by Duncan (2001)
above also apply to CGE analysis in many contexts. In particular, it has been argued that even
if CGE modelling incorporated unpriced effects, such as externalities, the use of GDP
constitutes an inappropriate measure of investment return, just as business turnover is not a
measure of profit (Kinhill Economics 1994, pp. 10, 14-15).
The BTE also criticise the use of GDP as a ‘benefit’. Using GDP for this purpose may not
accurately reflect investment decision-making processes or the costs of investment in a given
transport (or other) project measure using CGE. More specifically:
• Investment modelling can be extremely complex. Project resource requirements can
displace other projects, while project outcomes (such as better roads) can induce
complementary investments.
• These changes in complementary investment will affect GDP. With investment
decisions therefore being very difficult to accurately model, the ultimate effects on
GDP can be hard to predict (BTE 1999, p. 133).
• Focussing on GDP will not provide an accurate picture of the costs of investment.
Consider a road project decreasing costs to the farm sector. Lower freight costs may
induce farmers to spend more on machinery, inducing investment elsewhere in the
economy and adding to direct farm output, both of which would increase GDP.
However, the costs of the induced investment would not show up in the modelled
changes in GDP, as farmers may have reduced consumption expenditure to fund
increased machinery purchases. Thus merely modelling an increase in GDP would
reflect the gains from induced investment but not the costs (BTE 1999, p.134).
It is again noted that consumption expenditure rather than GDP is often used as a measure of
welfare by CGE modellers. However, to the extent that that consumption expenditure is also
related to modelled investment decisions within a CG framework, it could be expected that it
would likewise be dependent on the accuracy of such modelling.
Dwyer, Forsyth, Spurr and Ho (2004) have recently suggested a more structured approach to
deriving a measure of net social benefits, comparable to SCBA, from the output of CGE
modelling. This explicitly recognises that (unlike SCBA) CGE modelling does not allow for
opportunity costs in terms of land labour and capital when assessing economic impacts such
as changes in GDP.
The authors therefore suggest a methodology for assessing net benefits from a CGE model
within the context of a rise in tourism to NSW:
To do so, one subtracts the cost of additional inputs used to produce the increase in
activity. Thus the cost of additional labour used (wage by quantity), the cost of additional
capital services and cost of additional natural resources must be subtracted from the
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