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Scenarios using a computable general equilibrium model of the New Zealand economy

1 Introduction

This study is part of the Department of Labour's wider Economic Impacts of Immigration research programme and reports on the application of a computable general equilibrium (CGE) model of the New Zealand economy to investigate the economic impacts of immigration.

1.1 Economic Impacts of Immigration research programme

The Economic Impacts of Immigration research programme is funded from the Cross-Departmental Research Pool.[3] The overall objectives of the research programme are to:

The Economic Impacts of Immigration research programme is in two parts. The first part is designed to increase understanding of the impacts immigration has on specific sectors of the economy. The topics that have been explored as the first part of the programme are:[5]

The second part of the programme is the CGE modelling. The CGE modelling complements the first part of the analysis by giving an economy-wide perspective on the interaction between immigration and economic factors. Critical in such assessments is an understanding of the inter-relationships between other influences, immigration and the economy. This requires a general economy-wide perspective, as opposed to partial analyses of specific markets. It is also important to be able to investigate questions surrounding the sensitivity of key relationships. The CGE modelling framework is ideally suited to test and investigate the relationships between immigration and the economy in a robust economy-wide context.

While the first part of the work was undertaken independently of the CGE modelling process, its outcomes provided the CGE model with details about the economic impacts of immigration on the New Zealand economy. These work streams contained aspects that assisted in the formulation of the CGE model, as well as in the construction of the scenarios for investigation.

The outcome of this project also includes the provision of the CGE model and appropriate training to the Department of Labour, so it can undertake further experiments and simulations.

1.2 Research objective

The CGE modelling framework has been used to investigate several interrelated issues (see Figure 1.1). First, the model is used to give an understanding of how immigration interacts with the economy and estimate the value that it adds. This is achieved by simulating changes to the size (both increases and decreases) of the recent inflow of immigrants. Second, the impacts of high-skilled immigrants are tested by changing the composition of the inflow of immigrants to include many more highly skilled and fewer lower skilled. Third, increases in immigration may also have associated influences on productivity growth, and exports and imports. These are tested in individual experiments to understand individual impacts and then collated to understand their interaction. The idea is not only to focus on the impact of immigration from changes in absolute figures of the variables, but to identify relationships, influences and interactions within the economy. Additionally, understanding how immigration and influences such as the skill level of the inflow, productivity, or trade can interact will give policy-makers an idea about the factors that are most important to target.

Figure 1.1 Changing different aspects of immigration to test the impact on the economy

Figure 1.1 Changing different aspects of immigration to test the impact on the economy

The core results are compared with two similar studies. We first compare the results with a study on the economic impacts of immigration in New Zealand conducted in the late 1980s.[15] This is interesting because it shows how immigration has a different impact now than it did 20 years ago. Second, a comparison is made with a similar study conducted in Australia for the Australian Productivity Commission (2006) where the impacts of increasing the inflow of skilled immigrants by 50 percent was tested.[16]

1.3 Report structure

Section 2 outlines what a CGE model is, shows how to interpret the results from the model, and creates a base case for comparison. The scenarios to be tested are introduced in section 3, with the results reported and discussed in section 4 (with additional detail in the appendices). The report concludes in section 5.


Footnotes

[3] Supported by the Reserve Bank, The Treasury, the Ministry of Social Development, the Ministry of Economic Development, the Department of Internal Affairs, the Ministry of Pacific Island Affairs, Local Government New Zealand, and Housing New Zealand.

[4] Within New Zealand.

[5] All publications can be found on the Economic Impacts of Immigration webpage.

[6] Poot and Cochrane (2004).

[7] Slack et al (2008).

[8] Morton et al (2007).

[9] Sanderson et al (2008).

[10] Mar and Stillman (2008).

[11] Nana and Sanderson (2009).

[12] Mar and Stillman (2009a).

[13] Mar and Stillman (2009b).

[14] Mar et al (in press).

[15] Poot et al (1988).

[16] Productivity Commission (2006).