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

More documents

Recommendations

Info

Western Australian Economic Summary2006 No.3The foreign ownership variable should then flow through to subtractforeign-owned capital income from the income available to domesticconsumers. Linking domestic private consumption to tax-adjusted GrossNational Product (GNP) can do this.In comparative static models, the trade balance should be made exogenousin the long-run closure, with consumption endogenous to the model. Thetrade balance should be shocked to a (positive) level equivalent to after-taxoverseas income and debt repatriations (CREA, 1990, p. 17)).Labour Market and Interstate Migration AssumptionsLabour marketThe standard labour market assumption for most comparative static anddynamic CGE models is that national employment is variable in the shortrun with the national wage level fixed. In the long run, national employmentis fixed with the national wage level endogenous (Dixon and Rimmer,p. 32) 1 .An additional assumption for regional (State-level) CGE models 2 is that thenominal wage differential between States is not affected by the project (i.e. itis exogenous), and migration adjusts to maintain this wage differential. Thismeans that interstate migration will be large and instantaneous in responseto any policy change 3 .As noted in Section 3.2, these are simply assumptions and are not proven bytheir use in the model, but have a well-founded theoretical justification(Dixon and Rimmer, p. 32).It is recommended that modellers use these assumptions as a default labourmarket closure 4 . However, there is no reason why a modeller cannot usedifferent assumptions to the defaults if an external justification can beprovided and substantiated.1 In dynamic models, the path between the short and long run is facilitated by apartial wages adjustment mechanism (Dixon and Rimmer, p. 205).2 With each region modelled as a separate economy.3 This might be considered unrealistic, but is acceptable in the absence of a soundtheory for interstate migration.4 Although there is an argument for fixing the real wage differential (deflated byconsumer prices) between States rather than the nominal differential (Layman, 2006,p. 23).86 Department of Treasury and Finance
2006 No.3 Western Australian Economic SummaryFor example, a project might be planning to locate in a sub-State region thathas persistently high unemployment 1 , and the labour skills required by theproject are already possessed by the regional labour market or can be easilyobtained. In such a case then an increase in long run employment 2 can bejustified.Alternatively, in the current Western Australian (and Australian) labourmarket with a substantial skills shortage 3 , any short-run increase inemployment might not be reasonable. Here, any increase in labour demandresults in higher wages rather than an increase in employment.Make Sure Intermediate Input Responses are TrulyMarginalMany resource-processing projects are often promoted on the basis that theyadd value to the State or nation’s natural resources. If this is the case, theyshould be modelled as such and not include extra production of naturalresources (from the linkage industry that produces the raw material) as anincrease in intermediate demand from the project.Recent examples of such projects include gas-processing projects that usegas that could be exported or sold into the domestic market, and processingof plantation timber that would have been sold as woodchips. Theopportunity cost of exporting the resources in unprocessed form must bededucted from the net benefits of the project.The preferred method to implement such restrictions is to fix investment(through a swap with a variable in the investment function) and production(through a swap between output and capital productivity) of the linkageindustry. This method values the resource at its full opportunity cost 4 .Account for RiskWhen analysing a project or projects the analyst must allow for the risk of anoutcome other than as specified in a project proposal (both less and, ifnecessary, more optimistic).1 And people will not shift to areas of higher employment potential.2 Through a reduction in the State’s unemployment rate.3 Western Australia’s unemployment rate fell to 3.1% in July 2006, the lowest figuresince monthly records were kept in 1978 (ABS, 2006).4 This calculation becomes more complex if the resource-processing project bringsforward the mining of the natural resource, but fixing production at various timeintervals can accommodate this.Department of Treasury and Finance 87
Page 1 and 2:
Western AustralianECONOMIC SUMMARY2
Page 3:
Table of ContentsOverview .........
Page 6 and 7:
Western Australian Economic Summary
Page 8 and 9:
Page 10 and 11:
Page 12 and 13:
Page 14 and 15:
Page 16 and 17:
Page 18 and 19:
Page 20 and 21:
Page 22 and 23:
Page 24 and 25:
Page 26 and 27:
Page 28 and 29:
Page 30 and 31:
Page 32 and 33:
Page 34 and 35:
Page 36 and 37:
Page 38 and 39:
Page 40 and 41: Western Australian Economic Summary
show all

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

Create successful ePaper yourself

Delete template?

Save as template?