A linear programming model for economic planning in New Zealand

Abstract

A good deal of research into the likely future structure of the New Zealand economy has been carried out in the Agricultural Economics Research Unit. The aim has been to provide realistic quantitative sectoral targets or guidelines to centralised policy making bodies to assist in planning future economic growth in New Zealand. This type of exercise has often been referred to as indicative planning. Until now, the work has entailed the use of an input-output projection model which has come to be known as the Lincoln Model. Briefly, the procedure is to calculate for some future year an economic structure which satisfies the inter-industry relationships and which achieves an exogenously specified increase in the base year consumption level. Economic structure in this context means: the level of output of each sector of the model, the level of exports from each sector, the level of investment by each sector, the level of importing of current and capital goods by each sector. Whenever the Lincoln model has been discussed there has usually been some mention of the optimum economic structure. It has been said that the structure is optimum when resources are so allocated between sectors that the highest level of net national product per head is achieved, consistent with the maintenance of overseas balance of payments equilibrium, full employment and a reasonable growth in incomes per head. While many would question this definition, it is probably a reasonable basis on which to begin investigations into the best future shape of the economy and it is certainly where scrutiny of the projected structure should begin. It has also been suggested that the most efficient method of investigating the nature of an optimum structure is by the use of mathematical programming methods. The purpose of this paper is to demonstrate how the linear programming technique might be used to calculate the optimum economic structure, although it has been found necessary to modify the definition quoted above. Instead of accepting an exogenous target for consumption, programming is used to calculate the maximum level of consumption consistent with the inter-industry relationships and resource availabilities. The need to formulate linear functions has prevented optimisation of consumption per head which would be more acceptable theoretically.