Computable Name Author General Equilibrium (CGE) Modeling

Transcription

1 Computable Name Author General Equilibrium (CGE) Modeling Deltares, 16 January 2013 Onno Kuik

2 Outline Course overview Introduction to CGE modelling Calibration and use Data: Social Accounting Matrix Supply equations GTAP and GTAP-W 2

3 Léon Walras The first mathematical formulation of the general equilibrium model is credited to the French economist Léon Walras ( ) He described the economy with a system of simultaneous equations Léon Walras 3

4 A simple economy Household savings labour Bank goods investments Firm Intermediate goods 4

5 Markets clear! In general equilibrium theory, the economy is considered as a set of interrelated markets, where market agents (consumers and producers) freely buy and sell commodities in the form of final and intermediate goods and services and factors of production. There is a market for each commodity traded in the economy. Consumers own resources, from the sale of which, at given market prices, they earn an income. This income determines their consumption opportunities. Given this income, they choose the consumption bundle that maximizes their utilities. Firms transform inputs into outputs in a way that maximizes their profits, given market prices and the firms technological possibilities. In equilibrium, market prices are such that demand equals supply for all commodities. If firms operate with constant returns to scale technologies, they earn zero excess profits in equilibrium. 5

6 Prices do the work.. The basic premise of general equilibrium theory: There exists a set of prices such that all markets clear (supply = demand in each market) Formal proofs: Kenneth Arrow, Gerard Debreu (Nobel Prizes) In applied or computable general equilibrium analysis the challenge is: To find this set of prices Supply P* P Demand Qs Qd 6

7 Calibration and use Basic data for an economy for a single year of average of years (national accounts, household income and expenditure, input-output tables, tax data, trade, and balance of payments). Adjustment for mutual consistency: Benchmark Equilibrium dataset Replication check Choice of functional form and calibration to Benchmark Equilibrium Specification of exogenous elasticity values Policy change specified Counterfactual equilibrium computed for new policy regime Exit Further policy changes to be evaluated? Policy appraisal based on pairwise comparison between counterfactual and benchmark Shoven, J., and Whalley, J. (1992). Applying general equilibrium. Cambridge, Massachusetts: Cambridge University Press. 7

8 Calibration and use Basic data for an economy for a single year of average of years (national accounts, household income and expenditure, inputoutput tables, tax data, trade, and balance of payments). Adjustment for mutual consistency: Benchmark Equilibrium dataset 8

9 Calibration and use Replication check Choice of functional form and calibration to Benchmark Equilibrium Specification of exogenous elasticity values 9

10 Calibration and use Policy change specified Counterfactual equilibrium computed for new policy regime Exit Further policy changes to be evaluated? Policy appraisal based on pair- wise comparison between counterfactual and benchmark 10

11 The benchmark equilibrium: Social Accounting Matrix Firm Household Government Investment Total (received) Firm A C G F I A+C+G F +I Household W G H W+G H Government T F T H T F +T H Investment S H S G S H +S G Total (expended) A+W+T F C+T H +S H G F +G H +S G I A = intermediate deliveries, C = consumption, W = wages, T = taxes, S = savings, I = investment, G = government expenditures 11

12 The benchmark equilibrium: Social Accounting Matrix Key IO-table identities: Value of output equals value of all inputs Value of demand equals value of supply Value of endowments equals value of final expenditures In SAM: row totals equal column totals Firm House hold Gover nmen t Invest ment Total (recei ved) Firm A C G F I A+C+G F +I Househ old Govern ment Investm ent W G H W+G H T F T H T F +T H S H S G S H +S G Total (expen ded) A+W+T F C+T H +S H G F +G H + S G I 12

13 Functional form: supply equations Y ( ρ ) ρ ( ) ρ K L = φ βk + ( 1 β ), L 1 Y σ 1 σ = < ρ 1 0 Factor demand in levels Y L = ϕ P P Y L σ K L Factor demand in log-differences l = y + σ ( ) p l p y 13

14 GTAP model and database GTAP6 database (2001): 87 countries/regions 57 commodities/sectors 5 factors of production: 1. Land 2. Unskilled Labor 3. Skilled labor 4. Capital 5. Natural resources 14

15 GTAP-W Output σ=0 Value-added Intermediate inputs σ VAE Land Natural resource Labor Capital-Energy Composite 15

16 GTAP-W Output σ=0 Value-added Intermediate inputs σ VAE Land-Water Composite Rainfed Land Pasture Land Natural resource Labor Capital-Energy Composite 16

17 GTAP-W Output σ=0 Value-added Intermediate inputs σ VAE Land-Water Composite Rainfed Land Pasture Land Natural resource Labor Capital-Energy Composite σ LW Irrigated land Water Calzadilla, A., Rehdanz, K., & Tol, R.S.J. (2011b). The GTAP-W model: Accounting for water use in agriculture. Water, 3,