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The economy-wide effects of an economic development or industry policy are often ignored when developing or evaluating such a policy. However, these effects may be important for national welfare and can be estimated using CGE modelling. This paper explains the basics of CGE modelling in general and for the two models used in this paper. It then applies CGE modelling to four industry policy scenarios for the New Zealand economy to illustrate how it can be used and the range of results (including counter-intuitive results) that such models can provide. The scenarios span a range of topics: the effect of a 10% increase in demand for exports; comparing the effect of a 10% productivity improvement in large but low value-added sectors to the same improvement in small but high value-added sectors; a 15% R&D tax credit; and a 10% improvement in international freight productivity.
The author acknowledges the assistance received from Hamish Grant-Fargie, James Beard, and NZIER (in particular James Zuccollo); as well as the paper reviewers. NZIER part-funded and contributed the modelling for this paper.
The views, opinions, findings, and conclusions or recommendations expressed in this Working Paper are strictly those of the author. They do not necessarily reflect the views of the New Zealand Treasury or the New Zealand Government. The New Zealand Treasury and the New Zealand Government take no responsibility for any errors or omissions in, or for the correctness of, the information contained in these working papers. The paper is presented not as policy, but with a view to inform and stimulate wider debate.