A MULTIREGIONAL, MULTISECTORAL MODEL OF THE AUSTRALIAN ECONOMY WITH AN ILLUSTRATIVE APPLICATION*

Australian economists have applied computable general equilibrium (CGE) modelling techniques to issues of regional economic change for more than a decade. The first large scale CGE model of the Australian economy, the ORANI model, contained a regional equation system known as ORES (see Dixon, Parmenter, Sutton and Vincent, 1982). ORES is an example of a tops-down regional model, and is based on the method developed by Leontief, Morgan, Polenske, Simpson and Tower (1965). In the tops-down approach, industry results for output and employment are generated from the national CGE model and mapped to the regions on the basis of exogenous regional shares of industry output in the national industry total. The assumption of exogenous regional industry shares in the aggregate national industry output, limits the tops-down approach especially in its ability to model the impact of region specific shocks to the economy. For example, a reduction in payroll taxes in region A, which goes unmatched in other regions, may reduce the cost structure of regions A’s industries compared with the other regions’ industries. Facing lower relative costs, it is likely that region A’s industries that compete in national markets can increase their share of the national market at the expense of industries in regions that do not enjoy payroll tax cuts, thereby changing the regional distribution of output among industries.