Computable General Equilibrium Models- Part II 1 F R E I G H T T R A N S P O R T M O D E L I N G ( C I V L 7 9 0 9-8 9 0 9 ) D E P A R T M E N T O F C I V I L E N G I N E E R I N G U N I V E R S I T Y U N I V E R S I T Y O F M E M P H I S 09/05/2014
Material 2 Materials used in today s lecture are from Burfisher M.E., Introduction to Computable General Equilibrium Models, Cambridge University Press, 2011 Hosoe N.M. Gasawa K., Hashimoto H., Textbook of Computable General Equilibrium Modeling, Palgrave Macmillan, 2010
Topics Social Accounting Matrix (SAM) 3 A Simple CGE model Spatial CGE Models
Social Accounting Matrix (SAM) 4 BRD: Bread, MLK: Milk, CAP: Capital, LAB: Labor
SAM General Database of CGE organized into a table Report the value of transactions in a circular flow National Income & Spending Time: Usually over a year Agents: Industries Factors of production (e.g. labor & capital) Household consumers Government Rest of the world 5
Key Features Of SAM Square matrix (each agent has a column and a row) Column = Spending Row = Income Each cell is simultaneously an expenditure by an agent and a source of income to an agent For each agent total expenditure=total income (i.e. column sum = row sum) 6
Accounts in SAM 7
Production Activities-1 Domestic industry engaged in production of goods Column accounts for all expenditures on inputs Column sum= Gross Output=Value Added+Cost of Inputs 8 Value added
Production Activities-2 Row records sales of output 9 Assumption: All production is sold to a commodity account We will see later on why
Production Activity and Commodities 10 2 and 24 billion(import and domestic) of AGR products are purchased by AGR 160 and 229 (import and domestic) of AGR products are purchased by MFG AGR Sold in total 434 billion
Land, Labor, Capital Factors of Production 11 Subcategories: Skilled vs. Non-skilled labor ROWS Columns
Regional vs. Private Households Regional: found in some CGE models and SAMs (equivalent to GDP) Row: Sources of aggregate national income from factor incomes and taxes Column: Allocation of aggregate domestic spending (by household and government) and national savings Private: Income and spending of individuals in an economy Receives after income tax income from the regional households column account Difference: Government and Savings 12
Regional Household Production 13 RH earns 31+5,397+1,632=7,060 billion from factors RH also earns from indirect taxes (25+2+1+47) RH also earns from indirect taxes (2+178+45-3+1021+90+469+1693) TOTAL 10,628
Regional and Household Consumption TOTAL 10,628
Building SAM (from I-O) 15 Sum-Of-Rows=Sum-Of-Columns
Building SAM (from I-O) 16 20+30,15+25
Building SAM (from I-O) 17 50 40 5+4, 1+2 90 50 40
Building SAM (from I-O) 18 Total Exports Total Imports 50 40 9 3 24-12 90 12 50 40 9 3 Trade deficit
Building SAM (from I-O) 19 So far we used Sum-Of-Rows=Sum-Of-Columns 50 40 9 3 12 90 35 12 12 31 50 40 9 3 90 35 We need one of the three cell values (say direct tax revenues from national account tables)
Final SAM 20
Assumptions A Simple CGE Model Static: No investment and savings Close Economy: No international trade Two goods: Break (index i) and Mil (index j) Two factors: Capital (index h) and labor (index k) One representative household consuming goods Two representative firms producing bread and milk (one commodity per firm) Find demand, supply and prices 21
Model Structure 22 Utility function from consumption of bread (BRD) and milk (MLK) Production Function of BRD Functions of factor inputs
Household Behavior 23 Total Expenditure = Total Income
Household Behavior Solution 24 φ is the Lagrange multiplier First-order optimality conditions Increase in price decrease in consumption Increase in salary increase in consumption
Firm Behavior 25 Firms j net profit maximization function First term: Profit Second Term: Factor cost Production function (not really a constraint)
Firm Behavior Solution 26 ω j is the Lagrange multiplier First-order optimality conditions Same rational as with households (price change of factors or product)
Model of System 27 Market Clearing Conditions 1. Demand of good i=supply of good i 2. Total demand of factor i satisfied 3. Firm s supply price equal to demand price
Spatial Components: SCGE Tavasszy, Thissen, Ooosterhaven (2011) Challenges in the application of SCGE models for transport appraisal. Research in Transport Economics, 31, pp: 12-18 28 Usage: Analysis of indirect effects of transport projects to the economy Linkage: Transport sector Static Equilibrium Models of Interregional Trade and Location Prices include transport costs Still young models lacking empirical foundation (theoretical is sound) see Tavasszy et al. (2011)
Computable General Equilibrium Models- Part II 29 F R E I G H T T R A N S P O R T M O D E L I N G ( C I V L 7 9 0 9-8 9 0 9 ) D E P A R T M E N T O F C I V I L E N G I N E E R I N G U N I V E R S I T Y U N I V E R S I T Y O F M E M P H I S 09/05/2014
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