Dairy's role in sustaining New Zealand - Fonterra

12 Dairy’s role in generating growth
2.5 How we analyse the modelling results
In analysing the modelling results we take a systematic approach of tracking the impacts as
they flow through the economy, beginning with the direct impacts on the dairy sector itself.
We look at the export and domestic markets, and how the sector responds to growth with
increased employment and investment.
We then analyse the flow-on or indirect impacts on other industries. We split indirect impacts
into the following industry categories:
• Supplying industries – industries that supply dairy with intermediate inputs are likely to
benefit from a stronger dairy sector. These are industries such as agricultural services and
the fertilizer industry.
• Household expenditure industries – industries that households spend money on are
likely to benefit from increased income that comes through higher employment and
wages, and increased returns to capital from a growing dairy sector.
• Government industries – industries that rely on government funding are positively
impacted by a stronger economy and bigger tax takes, as this increases the money
available for the government to spend.
• Competing export industries – industries that compete for resources (such as land and
labour) with the dairy sector lose from dairy’s growth.
Finally, we examine the macroeconomic effects. Here we report both value-add (GDP) and
Net Economic Benefit/welfare (private and public consumption) measures.
There are two ways to think about the way that export growth will affect GDP:
(i) GDP is the sum of the value of expenditure on goods and services made in New
Zealand and exports are a component of that expenditure, so a change in exports
directly affects the level of GDP. The change in exports will then have flow-on effects
on other parts of the economy, as described in our results section.
(ii) GDP is also the sum of the value of resources utilised in the economy. Increased dairy
exports are generated, in part, by gains in productivity. Greater productivity allows
the same resources – capital, land and labour – to generate greater value, so GDP
increases as productivity rises. Thus we expect export growth to have a direct impact
on GDP and, in the long run, a positive impact.
Although GDP is the most commonly used measure of economic performance, it does
not capture necessarily how ‘well off’we are as a country. GDP is essentially a measure of
how many goods and services New Zealand produces – it shows the size of the economy.
Consumption shows how much household and government spending increases following
a change in the economy. It is more appropriate than GDP as a measure of welfare (see
Coleman, 2008), particularly in cases where we expect changes in the terms of trade 7 .
Ultimately, the objective of an economic development is to raise the living standards of the
population. Living standards are better proxied by household and government spending
ability than by GDP. Thus our preferred NEB/welfare measure is consumption. Our CGE model
allows us to determine, once all inter-industry effects and factor price changes have occurred,
the additional boost to New Zealand’s GDP and NEB/welfare resulting from a price change
in the milk solids payout or volume growth in the sector. In addition, we also report other
macroeconomic indicators such as wages and employment.
7. We use the term ‘welfare’here not in the technical economic sense but merely as a synonym for ‘wellbeing’. The claim is merely that
changes in consumption better proxy changes in welfare than do changes in GDP. We do not claim to actually measure welfare in
the technical sense.