3.1 ORANI-G for New Zealand
This model, which belongs to NZIER, uses the ORANI-G model design with New Zealand data and sectoral breakdown. The original ORANI-G model is Monash University's model of the Australian economy and has been used for many years in a variety of contexts. In the New Zealand version of the model, the production parts of the economy are divided into 131 industries, which produce 210 commodities. The data for the model mostly originates from 1996 and 2003 supply and use tables produced by Statistics New Zealand, which has then been calibrated to 2010 data by rescaling and updating specific data points where available.
In any CGE model, a small number of prices and quantities must be held constant (known as the model's "closure"). The modeller can choose which prices and quantities are held constant, to suit the scenario they are studying. For the scenarios studied here, the ORANI-G model is used in a long-run mode, where the quantity of labour and the long-run rates of return to capital are held constant. The labour market can therefore increase wages but not the quantity of labour, if demand for labour increases. Industries can create capital (the quantity of capital is not fixed), but their long-run rate of return on that capital (its price) is fixed for each industry.
New Zealand is a very small player in most world markets. This means we have little or no effect on prices. Our level of imports is too small to be noticed relative to world demand, and increasing our demand does not cause world prices to increase. In the New Zealand version of the ORANI-G model, this is represented as fixed import prices. Similarly, in most markets New Zealand only supplies a small proportion of the international market (dairy products being a notable exception), and so a change in supply from New Zealand will have very little impact on prices. In this model, this is represented by high export elasticities in most industries.
ORANI-G has production, household, investment, and government parts; it interacts with the rest of the world through imports and exports. Inventory levels can change. The investment sector creates fixed capital to sell to each industry from domestic and imported commodities, minimising the cost to do so. Exports are inversely related to price (with a high elasticity as noted above).
The production part of the model assumes perfect competition and maximises profits. Each industry uses intermediate inputs, which might be domestically produced or imported, and primary factors. The primary factors are land, capital, and several types of labour, brought from one representative household. Each industry can also produce more than one commodity, which are then destined for local and export markets.
The household maximises their utility by buying domestic and imported commodities. Some of this consumption is deemed to meet subsistence needs, and the rest is due to desires for luxuries. They receive income to finance their consumption from selling primary factors - labour, capital, and land - to the production sectors.
Government demand is determined by a fixed ratio to the demand by households. The percentage change of commodities going into inventories is the same as the percentage change in production and importation of those commodities. The government gets income from taxes on intermediate goods, investment, households, exports, and government consumption.
The full technical documentation (Horridge, 2003) for the ORANI-G model can be found at Monash University's Centre of Policy Studies (CoPS) website www.monash.edu.au/policy/oranig.htm
