The impact of the 2002-2003 drought on Australia

TERM (The Enormous Regional Model) is a “bottom-up” CGE model of Australia which treats each region as a separate economy. TERM was created specifically to deal with highly disaggregated regional data while providing a quick solution to simulations. This makes it a useful tool for examining the regional impacts of shocks that may be region-specific. We include some details of how we prepared the TERM database, using a national input-output table, together with regional data showing output (for agriculture) and employment (in other sectors) for each of 144 sectors and 57 regions (the Australian statistical divisions). Using a 38-sector, 45-region aggregation of the model, we simulate the short-run effects of the Australian drought of 2002-2003, which was the most widespread for 20 years. The effects on some statistical divisions are extreme, with income losses of up to 20%. Despite the relatively small share of agriculture in Australian GDP, the drought reduces GDP by 1.6%, and contributes to a decline in unemployment and to a worsening of the balance of trade.