Principal Economics’ sub-regional CGE model (PECGE)
We used the static version of our advanced sub-regional CGE model of the NZ economy. Our model is developed in collaboration with the CoPS43 (University of Victoria in Melbourne). Our database is calibrated with 2020 input output tables from Stats NZ, which is the latest available input-output table for New Zealand.
In PECGE, economic sectors are connected to households through the goods and services they provide, the wages that they pay and the labour input that they receive. The industries also provide goods and services to the government and receive services in return. The government and industries are financially connected through subsidies and taxes. The rest of the relationships across industries, households, government, and financial sector for one subregion in the model are illustrated in the figure. We have 81 subregions in the model, representing territorial authority geographic definition (and for Auckland we have further disaggregation). Each subregion has similar relationships across the sectors of their economies. This is the highest level of disaggregation of regional and industrial relationships available in New Zealand. All the regions are connected to the global economy, through trade, capital markets and labour force. The capital outputs of trade flow to the economy of all the sectors of the economy through the finance market. For technical reasons, we often aggregate the database to run the model. Therefore, although details of all regions/industries are not presented in the results, they have been used as into our model.
Our CGE model captures all economic interactions in the New Zealand economy, including trade and spending between firms on one another’s goods and inputs; spending by consumers on goods; investment decisions; and dynamics in the market such as demand for factors such as capital and labour, trade, employment and wage effects.
The outputs of our CGE model will provide regional and national level estimates of GDP, employment, industry outputs and import/export, and households’ economic wellbeing.
In any economic model, we must choose what is to be determined within the model (the endogenous variables) and what is to be considered external to the model (the exogenous variables); that is, we are ‘setting up closures’. The process of drawing this line depends on model tractability and the purpose for which the model is to be used. We use a long-term closure for this study because trade impacts happen over time, and it takes time for the economy to adjust to use new lower trade costs and to benefit from that. For example, workers should have enough time to see higher wages in other regions to decide to move, and hence labour movement does not happen in the short-term closure.
We assume a long-run model closure in which the following assumptions are made:
Labour market closure: total national employment is fixed but perfectly mobile across industries and/or regions as workers look for better opportunities (expressed in terms of real wages). Therefore, the real wage adjusts.
Capital market closure: capital stocks adjust to maintain fixed rates of return. We assume that capital is mobile between industries and regions.
External closure: The balance of payments is a fixed proportion of nominal GDP. The real exchange rate is endogenous. So, negative shocks to the economy are not funded by borrowing from overseas.
Fixed investment/capital ratios. In other words, the percentage changes in capital and investment are equal in the long term. Therefore, investment is equal in all sectors/regions following the capital stock.
Other fixed elements of our model are land use, import prices, number of households, taxes production, national labour supply, technological change, foreign demand for NZ products, growth rate of return of capital, and national population.
Centre of Policy Studies (COPS).↩︎