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.