Papua New Guinea is the largest recipient of Australian foreign aid. Since it's independence in 1975, this aid has mostly been in the form of grants for budget support. In the literature, the supporters of the concept of foreign aid argue that aid has failed to achieve development in Less Developed Countries (LDC's) in the past because it has been given directly to governments, who waste and abuse the funds. These critics suggest that aid should now be given directly to the poor in LDC's to help them improve their living standards, which will in tum help these countries achieve economic and social development. The Australian foreign aid program in PNG is changing in line with this view. Aid for budget support is being reduced, and is being replaced with programmed aid for the use in specific projects in industries such as health, education, transport, and agriculture. The aim of this thesis is to determine what effect the changing nature of Australia's foreign aid program will have on the PNG economy. The empirical results generated by the PNG general equilibrium model suggest that, overall, the change has been favourable. The theory of foreign aid suggests, though, that aid will not achieve anything unless the government and the people of PNG are prepared to change their traditional way of life and commit themselves to achieving economic development.