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Abstract
This concerns CGE modelling development specifically on the Murray-Darling Basin in Australia. It outlines some of the key necessary elements for modelling. In particular, since farm production technologies in the basin are highly flexible, the supply side of a CGE model should reflect this flexibility. The bottom-up regions in the model are quite small, as it is important to distinguish regions between which water trading is possible from those in which such trading is not possible. Water accounting is incomplete if it does not include the contribution from rainfall. If surface water allocated by managers does not change, but rainfall is in deficit, the price of water will rise. We will struggle to capture this effect in a model which does not include rainfall, reflected both in the initial conditions of irrigation water requirements and in the possibility to ascribe shocks to depict reduced rainfall. TERM-H2O modeling of drought in the basin resulted in substantial regional job losses. The pre-GFC bio-fuels boom and growing demand for dairy products in China partly alleviated drought-induced income losses.