Growth without prosperity in Rotorua
Rotorua's economy grew 3.2% in the year to March, according to regional GDP estimates, but the district's population grew 4.5% over the same period. Most of the growth came from a new $180 million timber processing plant employing 140 people and from construction of 320 new houses. The plant uses automated lines, and 60 of its jobs went to workers who moved from other local firms. Meanwhile, 45 hectares of pine plantation were converted to dairy support, and the local council has had to upgrade water treatment at a cost of $12 million. Average house prices rose 9%, and the median rent rose from $520 to $590 a week. Wages rose 3.0%, while the national CPI rose 3.9%. The council is deciding whether to approve a second plant that would add 2.5% to GDP but increase truck movements by 400 per day. The plant's owners say they will source logs locally.
1. Calculate real GDP per capita growth and explain what it shows about living standards in Rotorua.
Read the worked answer
Real GDP per capita growth ≈ (1 + 0.032) / (1 + 0.045) − 1 = 1.032 / 1.045 − 1 = −1.24%.
Total output rose 3.2%, but population rose faster at 4.5%, so output per person fell. This shows the difference between total growth and growth in living standards. GDP per capita is a better, though still imperfect, indicator of average material living standards.
In Rotorua, rents rose 13.5% ($520 to $590) and wages rose 3.0% against CPI inflation of 3.9%, so real wages fell about 0.9%. House prices rose 9%. For a renter on the average wage, housing costs rose much faster than income.
GDP also misses environmental costs (the $12 million water upgrade, land conversion), unpaid work and distribution. The 140 plant jobs may have displaced 60 workers from other firms, so the net employment gain is smaller than the headline. If those 60 workers were already employed, the plant mainly reallocates labour rather than creating new jobs.
Judgement: the district is growing in total output but not in average living standards, and the growth is not inclusive.
2. Explain how the new plant could increase economic growth in the short run and the long run, and identify one opportunity cost.
Read the worked answer
Short run: the $180 million plant is investment (I), which adds directly to aggregate demand and, through the multiplier, to income and spending. Construction wages and local supplier purchases add further demand. The 140 jobs raise household incomes.
Long run: the plant adds capital (capital deepening), may raise labour productivity through automation, and earns export revenue if timber is sold offshore. If it processes logs locally rather than exporting raw logs, it captures more value added and supports regional growth. The plant's local log sourcing could also support local forestry employment.
Opportunity cost: the resources used - $180 million of capital, land, water, road capacity, and the council's $12 million water upgrade - could have produced other goods and services. The 60 workers who moved from other local firms represent a transfer, not a net gain. The 45 hectares converted from pine plantation also lose future forestry output.
Judgement: the plant likely raises GDP, but the net gain to the district depends on whether the capital and workers would otherwise have been unemployed, and on whether the environmental and infrastructure costs are counted.
3. Evaluate whether the council should approve the second plant.
Read the worked answer
Benefits: +2.5% GDP, more jobs, higher incomes, extra tax revenue, and possible agglomeration benefits if it attracts suppliers. It may also support the local port and rail.
Costs: 400 extra truck movements per day - congestion, road maintenance, noise, emissions and safety. It adds demand for water and housing at a time when rents are already rising 13.5% and the council is spending $12 million on water. If the plant is automated, the employment gain may be small relative to the output gain, and it may displace workers from other firms.
Decision rule: approve if the marginal social benefit exceeds the marginal social cost. That requires the council to value the congestion and emissions costs and to check whether road and water infrastructure can cope. Conditions - a rail siding, consent limits on truck numbers, development contributions for housing - could reduce the costs. If the costs fall mainly on existing residents and the benefits on the plant's owners, the distribution matters.
Judgement: the GDP gain alone is not sufficient. On the evidence, approval with conditions is defensible; unconditional approval is not, because the truck and housing pressures are real and the GDP per capita gain may be small. The council should also check whether the 2.5% GDP figure is gross or net of the infrastructure costs.