Appendix A: Model structure

The model separately identifies 53 industries, 25 export commodities,
8 household commodities, and 40 occupation categories. The separately identified industries in the model are listed in Table B1 in Appendix B, along with their relevant Australia and New Zealand Standard Industrial Classification code (1996, revision 2).

Each industry produces a single output by way of a production function requiring a fixed combination of intermediate and primary factor inputs. At the secondary level, each intermediate input is a mixture of a domestically produced item and its imported equivalent. Producers can substitute between these two sources for each intermediate input in response to shifts in the relative price of each according to a constant elasticity of substitution (CES) mixing function. Substitution elasticities are less than infinite to reflect, in part, the degree of aggregation as well as technological limits to such substitution. Similarly, the primary factor input comprises a constant ratio of elasticity of substitution homothetic (CRESH) function, mixing 40 different types of labour and 1 physical capital resource.

Each industry's output is either sold to other industries for use as intermediate inputs or sold to meet final demand agents. The classification of imports is such that the output of each domestic industry competes against one imported equivalent item, subject to the substitution elasticity noted above.

These substitution decisions are underpinned by the neoclassical framework of profit-maximising and cost-minimising producers.

Final demand agents comprise other industries for the production of investment goods, domestic households for consumption, foreign demand for export, and government.

Investment in good production involves a similar CES mix of imported and domestic inputs. Aggregate investment is exogenous to the model, either as a fixed amount or as a set ratio to gross domestic product. However, investment activity is allocated across industries endogenously to equate expected rates of return.

Households allocate their income according to a linear expenditure system function across a consumption basket containing eight consumer categories. Within each of these categories, consumers can shift between domestically made items and their imported equivalents in response to relative price changes given the constraints of a CES function. Aggregate consumption is linked to household income, which is predominantly determined by employment income.

Government consumption demand is exogenous to the model, either at a set figure or at a specified ratio of gross domestic product.

Exports are modelled as facing a less than perfectly elastic demand curve. As such, foreigners demand more (or less) from New Zealand sources depending on the relative price competitiveness of New Zealand-made products compared with products from elsewhere. Differing elasticities among the commodities reflect, in part, aggregation as well as non-market barriers to the expansion of export sales. In general, New Zealand exporters of primary commodities such as dairy and meat face steeper demand curves than manufactures and service exporters.

The Business and Economic Research Limited computable general equilibrium model is maintained, updated, and solved using GEMPACK^[49] modelling software.

Footnotes

^[49] Pearson (1988).