Dairy's role in sustaining New Zealand - Fonterra

At the activity level, intermediate goods, primary factors and other costs are combined
using a Leontief production function. This means the proportion of production inputs does
not change. On the output side, there are two further constant elasticity of transformation
(CET) 13 nests. The production mix of each industry is dependent on the relative prices of each
commodity. Similarly, the export nest determines local and export market shares depending
on relative prices.
A.5 Regional extension
Policy impacts are often unevenly spread across industries and regions. To capture these
heterogeneous effects, the model is extended to include a regional component. A ‘topdown’approach
is used to decompose national impacts to the regional level, using regional
employment data as weighting. If a region has a high share of national output, then its
regional industry output will be proportionally affected. The exception is industries that
produce commodities (mostly services) that are largely consumed within a region. These are
deemed to be local industries, and it is assumed that their output moves in line with the local
demand for the corresponding commodity, rather than with the national industry output.
Note that an inherent assumption in the ‘top-down’approach is that industries use the same
production technology across all regions (Horridge, 2008).
13. A CET function is identical to a CES function except that the transformation parameter has the opposite sign (i.e. increasing price
increases output in a CET; in a CES, increasing price reduces demand)
Dairy’s role in generating growth
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