CGE modelling of the resources boom in Indonesia and Australia using TERM

provided by Research Papers in Economics

CGE modelling of the resources boom in Indonesia and
Australia using TERM

Glyn Wittwer and Mark Horridge¹

Centre of Policy Studies

Paper presented at the 51^st annual conference of AARES, Queenstown, New Zealand,
February 14-16, 2007.

Abstract

The sharp increase in Australia's terms of trade since 2003-04 has dramatic regional and
sectoral implications. Mining-intensive regions have gained from the jump in export
prices. Import-competing sectors have faced greater competition both from falling import
prices and due to rising demand for domestic factors from the mining sectors. The
drought of 2006 will widen the gap between winning and losing regions.

In Indonesia, even if we assume that the oil extraction sector is facing resource depletion,
a long-run terms-of-trade improvement may result in aggregate consumption increasing
should real GDP fall relative to the base case.

The TERM framework is highly suitable for modelling Brazil and China, each with
around 30 regions.

Contents

1. TERM as a tool for sub-national CGE modelling .......................................................... 2

2. Why TERM is quicker.................................................................................................... 2

3. TERM goes international................................................................................................ 3

4. Simulation of Australia’s terms-of-trade improvement.................................................. 3

5. An application to Indonesia using IndoTERM.............................................................. 10

6. Conclusion: future directions for TERM variants ........................................................ 15

References......................................................................................................................... 16

¹ The authors are grateful to AusAID for PSLP funding used to develop IndoTERM in conjunction with
Center for Economics and Development Studies (CEDS) at Padjadjaran University, Bandung, West Java.
The authors also acknowledge the funding of the Productivity Commission used to develop the 2001-02
multi-regional database for Australia, and funding from CSIRO and the Australian Research Council for
various enhancements to TERM.

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