6 Deflators
This section describes how various GDP deflators are computed in NZTM. The disaggregation of the GDP deflator into more detailed components is a major change since Szeto (2002). Behaviour in NZTM is determined by relative prices. For example, in the production block, when the price of commodity exports is higher relative to the price of “other goods” (ydo), the firm chooses to supply more commodity exports (see Section 4). In NZTM, we choose “other goods” price (pydo) to be the numeraire. As a result, the relative price of pydo is equal to one. Once pydo is determined, any individual price deflator can be backed out from its corresponding relative price.
6.1 Relative prices
“Other goods” (ydo) is a model variable that basically describes the amount of domestic production in the economy (with the exception of commodities). pydo is the deflator for the ydo variable.
where the first term and second term represent domestically produced non-housing consumption and non-residential investment respectively and notation for equation (6.1.1) is given in the following table.
| Variable | Label |
|---|---|
| conor | Real private consumption (non-housing) |
| pol4ww | The average rate of tax on consumption of non-housing |
| imc | Real imports of consumption goods |
| imcs | Real imports of consumption services |
| ibfr | Real private investment (non-housing) |
| ggifr | Real government investment |
| imca | Real imports of capital goods |
| ihr | Real housing investment |
| ggcor | Real total government consumption (non-wage) |
| ncexp | Non commodity exports |
Therefore, the relative price of pydo is equal to the weighted average of the relative prices of domestically produced non-housing consumption (rpyd_ca), domestically produced non-resident investment (rpyd_ia), residential investment (rpyd_h), government consumption (rpyd_gc) and non-commodity export goods and services (rpexnc).
where dwi are the weights.
The relative prices of non-housing consumption and non-residential investment are given by equation (6.1.3) and (6.1.4) respectively.
where rpmc, rpmcs and rpmca are the relative prices of consumption goods imports, household overseas expenditure and capital goods imports respectively.
With the assumption of rpyd_ca = rpyd_ia, substituting (6.1.3) into equation (6.1.2) yields the following:
Rearranging (6.1.5), the relative price of non-housing consumption can be written as:
The relative price of residential investment depends on its own lag and its equilibrium price (erpyd_h):
With the exception of the relative price of export services, the relative prices of all export and import components are given by the exogenous values of each output, measured at world prices, divided by the nominal exchange rate index (e) and pydo. For example, the relative price of consumption goods imports is:
where pimcf is the world price of consumption goods imports.
Reflecting that New Zealand service firms that export (predominantly tourism firms) have the power to set the price in the short run,[19] the relative price of export services can deviate from its equilibrium price (erpexncs):
Equation (6.1.9) can be rewritten as:
where ere is the equilibrium steady-state composite value of e and pydo.
Notes
- [19]This assumption can be justified by the fact that service firms tend to sell differentiated products and therefore are closer to monopolistic competitive, than perfectly competitive (if they sold the same product).
