Modelling the impact of declining Australian terms of trade on the spatial distribution of income

Abstract

Macroeconomic shocks such as movements in exchange rates or the terms of trade not only affect the overall economy but also affect different areas in a country in different ways, thus creating a spatial distribution of the shock. The effect on some regions is often larger than the national effect as regions differ in terms of resource endowments, economic activities, physical and human capital. The standard national CGE-Microsimulation framework is a useful approach to capture the distributional impacts of macro shocks on households at national and state and territory levels. However, the CGE-Microsimulation framework does not capture the distributional impact of a policy change or an external shock on small geographical areas of interest. To overcome this limitation, this paper extends the framework by linking a spatial microsimulation model to the national CGE-microsimulation framework in a top-down manner to capture the distribution of income in small areas of a macro shock. We simulate a potential decline in Australian terms of trade over 2012-13 to 2017-18 and find significant differences in the spatial distribution of the impacts of the shock