Table of Contents
Abbreviations x
Symbols in CGE Models xii
Tables, Figures and Lists xv
Preface xviii
1 Overview 1
1.1 Economic analysis with computable general equilibrium models 1
1.2 Framework of CGE models 3
1.3 Advantages and shortcomings of CGE models 5
1.4 Applications of CGE models 6
1.5 Aims of this book 6
1.6 Software and simulations on the PC 8
1.7 Structure of this textbook 10
2 The Simple CGE Model 13
2.1 Setup of the economy 14
2.2 Household behaviour 15
2.3 Firm behaviour 16
2.4 Market-clearing conditions 18
2.5 Model system 19
3 Computation 23
3.1 Example: the 'household utility maximization model' 23
3.1.1 Formulation of the model 24
3.1.2 Specifying coefficients and exogenous variables 25
3.2 Computational procedures 25
3.3 Preparing input files 27
3.3.1 Structure of input files and general syntax of GAMS 27
3.3.2 Directives 29
3.4 Results of computation in the output file 36
4 The Social Accounting Matrix 41
4.1 Structure of social accounting matrix 42
4.1.1 Social accounting matrix for the simple CGE model 42
4.1.2 SAM for the standard CGE model 44
4.2 Construction of social accounting matrix 47
4.3 Example: Social accounting matrix for Japan 50
4.4 Consistency among various databases and matrix adjustment for a SAM 56
5 Calibration and Computational Strategy for General Equilibrium 61
5.1 The basic concept of calibration 61
5.2 Value, price and quantity 63
5.3 Calibration procedure - mathematical manipulation 64
5.3.1 The case without indirect taxes 64
5.3.2 The case with indirect taxes 69
5.4 GAMS programming 70
5.4.1 Programming procedures and an input file 70
5.4.2 Declaration and definition of sets 73
5.4.3 Installation of the SAM 74
5.4.4 Retrieval of data from the SAM 75
5.4.5 Calibration 76
5.4.6 Specifying and solving the CGE model 78
5.4.7 Initial values for numerical computation 78
5.4.8 Uses of lower bounds 79
5.4.9 Choice of numeraire 80
5.5 Solution of the simple CGE model 80
6 The Standard CGE Model 87
6.1 Overview of the standard CGE model 87
6.2 Intermediate inputs 89
6.3 Government 92
6.4 Investment and savings 93
6.4.1 Introduction of investment and savings 93
6.4.2 Modification of household and government behaviour 95
6.5 International trade 96
6.5.1 Small-country assumption and balance of payments 96
6.5.2 Armington's assumption 97
6.5.3 Substitution between imports and domestic goods 98
6.5.4 Transformation between exports and domestic goods 99
6.6 Market-clearing conditions 102
6.7 Model system 103
6.8 GAMS programming 106
6.8.1 Declaration of sets, installation of the SAM and derivation of the initial equilibrium values 112
6.8.2 Calibration 114
6.8.3 Model solution 118
7 Macro Closure 122
7.1 Investment and savings-macro closure in a closed economy model 123
7.2 Current account balance-macro closure in an open economy model 125
7.3 Other closure rules 127
8 Simulating General Equilibria 128
8.1 Multiple runs in one input file 129
8.2 Computation of indicators from solved values 131
8.3 Measurement of economic welfare 133
8.4 Sensitivity analysis 137
8.4.1 The concept of sensitivity analysis 137
8.4.2 Example of sensitivity analysis with the standard CGE model 138
8.4.3 Sensitivity analysis with a three-sector model 139
9 Interpretation of Simulation Results 144
9.1 One-sector model 145
9.1.1 A small open economy 145
9.1.2 Impact of import tariffs 149
9.1.3 Impact of transfers from abroad 151
9.1.4 Impact of terms of trade shock 152
9.2 Two-sector model 153
10 Model Extension 158
10.1 Multihousehold model 158
10.2 Large-country model 161
10.3 World trade model 167
10.3.1 Two-country model 167
10.3.2 Multicountry model 174
10.4 Imperfect competition model 176
10.4.1 Monopoly model 176
10.4.2 Oligopoly model 182
10.5 Quantitative restrictions 182
10.6 Increasing-returns-to-scale model 187
11 Concluding Remarks 191
11.1 Extensions inside the CGE models 191
11.2 Extensions outside the CGE models 192
11.3 Concluding remarks for better CGE modelling 193
Appendix I Derivation of Household Demand Functions 195
Appendix II Competitive Equilibrium vs Social Optimum 196
Appendix III Utility Maximization and Lagrange Multipliers 199
Appendix IV Reformulation of a System of Simultaneous Equations into an Optimization Problem 200
Appendix V Leontief-type Function and Optimization 202
Annex A Advanced Uses of GAMS 204
A.1 Set 204
A.1.1 Sequence in a set 204
A.1.2 Alias of a set 204
A.1.3 Subset 205
A.2 Setting values with formula 205
A.3 Large Table data input 206
A.4 Output file 207
A.4.1 Printing variables and constants 207
A.4.2 Suppressing output 208
A.5 Communicating with spreadsheet software 208
A.5.1 Transfer of data in an input file into a spreadsheet 209
A.5.2 Transfer of data from a spreadsheet into a GDX file 211
Annex B How to Cope with Errors and Infeasibilities 213
B.1 Case 1: Compilation error 213
B.2 Case 2: Execution error and Case 3: Solve error 216
B.3 Case 4a: No base run equilibrium solution 220
B.4 Case 4b: No counterfactual equilibrium solution 221
B.5 Case 5: Incorrect solution 222
B.6 Capacity limitation of GAMS 222
Annex C Web Resources 224
References 226
Index 229
GAMS Index 234
