La Inteligencia musical

Initial level Change Updated leve

a _{Change in the national working-age population arising through demographic change (mortality, overseas}

migration and ageing of the population).

Equation E_natlab # National supply of labour by occupation #

(all,o,OCC)

natlab(o) = natlab_o + SIGMALABO*[natpwage_i(o) - natpwage_io];

Equation E_lab # Labour supply by state and occupation #

(all,q,REGDST)(all,o,OCC)

lab(q,o) = natlab(o) + SIGMALABS*[pwage_i(q,o) - natpwage_i(o)];

7.4

Export supply

The description of VURM in chapters 2, 3 and 6 assumes that producers can instantaneously adjust their pattern of sales to ensure that the same basic price is received across all categories of demand — production, investment, household consumption, exports, regional and federal government consumption, inventories and the National Electricity Market.

However, the presence of contractual arrangements and other short-term rigidities may mean that producers cannot instantaneously adjust the pattern of their sales in response to any differences in price across different categories of demand in the short term. This less than instantaneous adjustment may give rise to ‘price wedges’ between sales to certain markets. As contracts are re- negotiated and other adjustments occur (including to the level of production), producers would vary production levels and sales mixes to reduce or eliminate any price differences. The combination of physically distinct products in aggregative classifications, such as used in VURM, also complicates the modelling of adjustment between export and domestic use.

Interstate migration by region &

occupation

Updated labour supply by region & occupation Change in the national pool of laboura Transformation in national supply of labour by occupation Initial labour supply by

region & occupation

Change in labour supply by region &

The problem of modelling export supplies in general equilibrium models has been recognised for some time,44 _{and extensions using the constant elasticity of transformation (CET) aggregation} function have been included in precursors of VURM. Gretton (1998) introduced transformation possibilities across all categories of demand in the ORANI model. The export component of the ORANI transformation was added to the Monash model for use in replicating structural and other economic change over time (PC, 2000) and Horridge (2003, 2011) introduced export transformation as an option into the ORANI-G model.

The current version of the VURM has been extended to include the CET function to model supplies as gradually switching between the domestic and export markets in response to any difference in the basic price (termed ‘export transformation’).45 _{This enables VURM to handle existing contractual} arrangements and other real world factors that may impede the rate at which producers can switch sales between categories of demand in the short term in response to any price differentials.

The modelling of export supplies in VURM5 extends these earlier implementations in three ways:  implementation of export transformation is at the regional, rather than national, level;

 explicitly accounting for the additional returns to export sales (termed here ‘additional returns’) separately from those available from the domestic market; and

 quarantining the decision on primary factor use in production from the additional return on export sales.46

7.4.1 Volume of export sales Export supply (E_x4r_supply)

As described in section 3.6.1, equations E_x4rA to E_x4rF determine world demand for Australian exports. To operationalise the export transformation theory, a shift term, f_x4r1, is added to each equation to enable the export demand schedules to be turned on or off.

The supply of these export sales can be determined by the export transformation function, equation E_x4r_supply, which, if desired, allows the supply of export sales to vary positively in response to the gap between basic price of export sales (p4) and the weighted-average basic price across all categories of sales (p0com). The export transformation function can be turned on by setting the shift term exogenous (f_x4r2) and swapping it with the markup on export sales (d_p4markup).47

If equation E_x4r_supply is made operational, the supply of export sales will increase if the percentage change in the basic price of export sales exceeds that of domestic sales (and, hence, is above that of the average basic price). The converse will occur if the percentage change in the basic price of domestic sales (and, hence, the average basic price) exceeds that of export sales.

The CET export transformation parameter, EXP_TRAN, governs the rate at which switching between domestic and export sales can occur. A parameter value of 0 ensures that no substitution is possible and that export volumes move with domestic sale volumes. Sensitivity testing by Gretton (1988)

44 _{See Dervise, DeMelo and Robinson (1982) for an early example.}

45 _{References in this section to exports relate to foreign exports and not to interstate trade.} 46

The use of the term ‘normal rate of return’ in this chapter denotes the return to capital earned from sales to the domestic market. It does not include the additional return from export sales. The use of the term ‘normal rate of return’ does not imply that the model database is in equilibrium.

47 _{If both f_x4r1(c,s) and f_x4r2(c,s) are exogenous and p4markup(c,s) is endogenous, the export demand} schedule effectively determines the foreign currency price of exports.

indicated that a value of 300 approximates perfect transformation, so that the basic price of export sales moves in line with the basic price of domestic sales. In keeping with the earlier implementations of the theory, the export transformation parameter in VURM is set to value of 0.5 for all commodities and source region combinations.

The twist term locsaletwist is included to enable exogenous shifts in the composition of sales of domestic production between the domestic and export markets. If locsaletwist>0, the shift term induces a switch away from export sales to domestic sales. If locsaletwist<0, the shift term induces a switch away from domestic sales to export sales.

! Export transformation !

Equation E_x4r_supply # Supply of commodities to the export market #

(all,c,COM)(all,s,REGSRC)

x4r(c,s) = x0com_i(c,s) + IF[V4BAS(c,s) ne 0, EXP_TRAN(c,s)*[p4(c,s) - p0com(c,s)]] -

[SALES(c,s) - V4BAS(c,s)]/ID01[SALES(c,s)]*locsaletwist(c,s) + f_x4r2(c,s);

7.4.2 Export and domestic prices

The transformation behaviour that underpins the exports supply equation is driven by the wedge between the return to producers from domestic sales (termed 'the basic price of domestic sales') and that received from export sales (termed 'the basic price of export sales').

The price wedge can be conceived of, and modelled as, a 'phantom tax' in the vein of Dixon & Rimmer (2002, pp. 28, 53 & 181-184). Under this treatment however, the return is not allocated to producers.

VURM extends this theory to allocate the 'phantom tax' to producers. Under this treatment, the price wedge means that producers can earn an additional per unit return (either positive or negative) from export sales. As a result, the ‘basic price’ of export sales can differ from the basic price of domestic sales.

The relationships between the purchasers’ price and the basic price of domestic sales and export sales for non-margin commodities are set out in figure 7.4.

It is assumed that the basic price received by producers on domestic sales (often called the ex- farm/mine/factory price) (the variable p0a in VURM) reflects the cost of production, including a return on capital. Taxes and margins that differ across categories of demand are added to the basic price give the purchasers’ price for each category of demand (upper panel of figure 7.4). These relationships are the same as existed in earlier versions of VURM.