Explaining a dynamic CGE simulation with a trade-focused back-of-the-envelope analysis: the effects of eCommerce on Australia

This paper was written in honour of Peter J. Lloyd on the occasion of his retirement and celebrates his preeminence as a theorist and practitioner of the economics of international trade. Besides a surprising number of leading trade theorists, Australia has added significantly to empirical work on trade issues via applied general equilibrium models, especially the ORANI and MONASH models. This paper focuses on one intriguing new topic, namely, the welfare and other economy-wide effects of the development of eCommerce. The direct effects of eCommerce are presented to the Monash model as shocks to 14 sets of technology, preference and trade variables. The shocks were suggested in group discussions with people knowledgeable in the operation of eCommerce and drawn from the sectors most likely to be affected by it. On the conservative assumptions made about the size of the shocks, eCommerce will after about 10 years allow a sustained increase in private and public real consumption of about 3 per cent. This and other results of the MONASH simulation are explained with the help of a relatively simple and small BOTE (back-of-the-envelope) model.