Dairy's role in sustaining New Zealand - Fonterra

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26 Dairy’s role in generating growth A.2 Dynamics of the MONASH-NZ model MONASH-NZ is a recursive dynamic CGE model based on the ORANI-NZ core. It can be thought of as a series of static simulations linked by three dynamic adjustment procedures. Each year’s simulation takes the final database of the previous year’s simulation as its starting point and applies the current period’s shocks. Because the solution for the current period depends only on the previous period’s solution and the current period’s shocks, it can be solved recursively, rather than having to solve all periods simultaneously. Economists might refer to this sort of model as having adaptive, rather than rational, expectations formation. In addition to solving a ‘static’problem in each period, the MONASH-NZ model improves upon ORANI-NZ simulations by adding three dynamic adjustment processes: • Labour market adjustment: We assume that wages are sticky in the short run and gradually adjust over time. A mechanism in the model allows employment to first respond to increases in aggregate demand and then return to the NAIRU over time as wages adjust. • Capital formation: An industry-specific capital accumulation mechanism allows industries to build their stock of capital over time. Capital is generated by investment, which in turn responds to rates of return in each industry. • Balance of payments adjustment: The model tracks changes in the current account and capital account over time. Changes in net foreign liabilities affect domestic consumption through the level of interest that must be paid to service the foreign debt. A.3 Database structure The model is based on a large database containing the value flows of the economy, as per Figure 11. The database defines the initial structure of the economy, which by definition is assumed to be in equilibrium in all markets. The structure of the database is broadly similar to traditional input-output tables; for example commodities may be used as intermediate input for further production, utilised in investment, exported or consumed by households and the government. Industry costs include the cost of intermediates, margins, taxes and primary factor costs for labour, land and capital. As per the accounting identities in inputoutput tables, the total value sum of producers’input costs (including margins, taxes, returns to factors and other costs) equates to the total value of output production (the ‘MAKE’matrix in the database). The MONASH-NZ model consists of: • 131 industries • 210 commodities • 14 regions • 1 household • 24 occupations The database has been sourced initially from Statistics New Zealand 1995/96 Inter-Industry tables, updated using the subsequently released 2003 Supply and Use tables, and finally ‘upscaled’to 2007 levels using latest Statistics New Zealand macroeconomic data.
Figure 11 The MONASH-NZ database Figure 11 The MONASH-NZ database Basic Flows Margins Taxes Labour Capital Land Production Tax Other Costs Source: Horridge, 2008b NZIER NZIER – Dairy’s role in generating growth Final report - 16 November 2010 Absorption Matrix 1 2 3 4 5 6 Producers Investors Household Export Change in Government Inventories Size ↑ ← I → ← I → ← 1 → ← 1 → ← 1 → ← 1 → C×S ↓ ↑ V1BAS V2BAS V3BAS V4BAS V5BAS V6BAS C×S×M ↓ ↑ V1MAR V2MAR V3MAR V4MAR V5MAR n/a C×S ↓ V1TAX V2TAX V3TAX V4TAX V5TAX n/a ↑ O V1LAB C = 210 Commodities ↓ I = 131 Industries ↑ 1 V1CAP S = 2: Domestic, Imported ↓ O = 24 Occupation Types ↑ 1 ↓ ↑ V1LND M = 5 Commodities used as Margins 1 ↓ ↑ V1PTX 1 ↓ V1OCT Joint Production Matrix Import Duty Size ← I → Size ← 1 → ↑ C ↓ MAKE Source: Horridge, 2008b; NZIER ↑ C ↓ V0TAR A.4 Production structure (Horridge, 2008b) The production structure of the model is presented in Figure 12. Each industry can produce a number of different commodities. Production inputs are intermediate commodities, both domestic and imported, and primary factors labour, land and capital. Working from bottom to top, we see constant elasticity of substitution (CES) production nests for occupations, primary factors and the choice between imported and domestic commodities. In this case, an increase in price moves sourcing towards another input, for example, if the price of imports increases, more domestic commodities are demanded in the intermediate sourcing CES nest. 31 Dairy’s role in generating growth 27
Page 1 and 2: Dairy’s role in sustaining New Ze
Page 3 and 4: Key points Dairy makes a very stron
Page 5 and 6: It drives many rural economies: “
Page 7 and 8: Contents 1. The current contributio
Page 9 and 10: 1. The current contribution of dair
Page 11 and 12: Table 2 Export values $ millions, 2
Page 13 and 14: Figure 3 Importance of dairy to reg
Page 15 and 16: Table 3 Farming industry structure
Page 17 and 18: 2. Modelling dairy’s economic con
Page 19 and 20: Figure 5 Change in milk solids pric
Page 21 and 22: 3. Milk solids price spike 3.1 Head
Page 23 and 24: Table 5 Indirect impacts 2010 Perce
Page 25 and 26: Figure 7 Gross regional product imp
Page 27 and 28: 4. Production growth over the last
Page 29 and 30: Table 9 Indirect impacts 2008/09 Pe
Page 31 and 32: Figure 9 2009 Gross regional produc
Page 33: Appendix A CGE modelling framework
Page 37 and 38: At the activity level, intermediate
Page 39 and 40: Table 12 IO vs. CGE multipliers Mul
Page 41 and 42: Appendix D References Bandara, J. S
Page 43 and 44: Farming Milk & cream Ice cream Chee
Page 45 and 46: Farming Milk & cream Ice cream Chee
Page 47: Appendix G Changing dairy export ma

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