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



Table 7. Decomposition of Indonesia’s real GDP on income side (contribution %)

Oil productivity

Trade price

________Total________

Land

0

0

0

Labour

0

0

0

Capital

-0.46

-0.86

-1.32

Technology

-0.78

0

-0.78

Production tax

0

0.01

0.01

Indirect tax_______

_________-0.04_________

-0.06

-0.11_________

Total____________

_________-1.28_________

-0.92

_________-2.20_________

First, we consider the impact of oil productivity on the economy. We can decompose the
real GDP result by adding up changes in productive factors (land, labour and capital) net
of changes in technology. There are three sources of real GDP or income loss from
declining oil productivity. Capital income accounts for 49% of GDP in the base case, so
that a decline in aggregate capital stocks of 0.95% (table 6, 1st column) reduces real GDP
by 0.46% (= 0.49 x 0.95). Crude oil’s productivity decline of 20% contributes to a
decline in real GDP of 0.78%. And a decline in indirect tax income reduces real GDP by
0.04%. The three contributions sum to -1.28% (table 6, 1st column).

Under the column headed “trade price” in tables 6 and 7, we show the impacts of rising
export and import prices for energy commodities. Higher energy prices lead to a decrease
in aggregate capital stocks, as industries lower investment relative to the base case in
order to restore rates of return to base case levels. The decline in aggregate capital stocks
of 1.78% (table 6, 2nd column) contributes to a decrease in real GDP of 0.86% (table 7,
2nd column). The remaining 0.05% of the real GDP arises mainly from lower indirect tax
income (table 3). Note from table 6 that export prices rise more than import prices. This
terms-of-trade increase equals 8.4% (=(17.8-8.7)/1.087). We expect terms-of-trade
improvements acting alone to increase the share of aggregate consumption in real GDP.
This is because our consumption function links nominal consumption to nominal income
or GDP. The consumer price index (CPI) includes the price of imports but not exports.
The GDP price index or deflator includes the price of exports but not imports. Therefore,
a terms-of-trade improvement results in the GDP deflator increasing by more than the
CPI (table 2). Hence, if nominal consumption falls by the same percentage as nominal
GDP, real consumption will fall by a smaller percentage than real GDP due to the terms-
of-trade effect. In addition, aggregate investment falls (-4.5%, table 6, 2nd column) by a
larger percentage than real GDP, making a larger share of national income available for
household consumption. Note that although we assume that real government expenditure
is exogenous, its share of GDP is substantially smaller than that of real investment. Since
government spending accounts for only 7% of GDP, compared with 71% for aggregate
consumption in the base data, reducing government spending in line with GDP would
make little difference to aggregate consumption. The substantial improvement in the
terms-of-trade results in an unusual result in the 2nd column of table 7: real household
consumption increases by 1.53% despite real GDP falling by 0.92%.

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