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Material Type: Exam; Class: Art Appreciation; Subject: Art; University: West Virginia University; Term: Spring 2007;
Typology: Exams
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Computable General Equilibrium (CGE) Models:
A Short Course
Hodjat Hodjat
Ghadimi Ghadimi
Regional Research Institute Regional Research Institute
WWW.RRI.WVU.EDU WWW.RRI.WVU.EDU
Spring 2007 Spring 2007
Ghadimi 2007; Regional Research InstituteGhadimi
2007; Regional Research Institute
Session Three: Implementation
Database Database
Calibration Calibration
Solution Strategy Solution Strategy
GAMS Software GAMS Software
Ghadimi 2007; Regional Research InstituteGhadimi
2007; Regional Research Institute
Session Three: Implementation
Required data Required data
IO table, might need a
g
gregation
NIPA
May need census data
Estimates of sectoral
sectoral capital stock &
capital stock &
depreciation depreciation
Generate a SAM Generate a SAM
Capital Composition Matrix Capital Composition Matrix
Database Database
Ghadimi 2007; Regional Research InstituteGhadimi
2007; Regional Research Institute
Session Three: Implementation
No set of rules on the appropriate No set of rules on the appropriate
level of aggregation; judgmental, level of aggregation; judgmental,
and depends on: and depends on:
Focus of the model Focus of the model
Availability of data Availability of data
Feasibility of computation Feasibility of computation
Time constraints. Time constraints.
Database Database
Ghadimi 2007; Regional Research InstituteGhadimi
2007; Regional Research Institute
Session Three: Implementation
A reasonable estimate of A reasonable estimate of sectoral
sectoral capital
capital
stocks is indispensable in any economic stocks is indispensable in any economic model that deals with model that deals with sectoral
sectoral production.
production.
Methods: Methods:
Use historical investment data, adjusted for Use historical investment data, adjusted for price inflation and depreciation, to obtain price inflation and depreciation, to obtain capital stocks. capital stocks.
Use capital Use capital
output ratios to derive rough output ratios to derive rough
estimates of capital stocks. estimates of capital stocks.
Derive an estimate of capital stock using data Derive an estimate of capital stock using data on capital income and net rate of return to on capital income and net rate of return to capital capital
Database Database
Ghadimi 2007; Regional Research InstituteGhadimi
2007; Regional Research Institute
Session Three: Implementation
Use independent estimates of Use independent estimates of
sectoral sectoral depreciation rates if exists
depreciation rates if exists
Otherwise, use the available Otherwise, use the available
historical data on historical data on sectoral
sectoral capital
capital
formation estimate these rates by formation estimate these rates by
determining only the depreciation determining only the depreciation
rates of capital types that are rates of capital types that are
present in the economy. present in the economy.
Database Database
Ghadimi 2007; Regional Research InstituteGhadimi
2007; Regional Research Institute
Session Three: Implementation
A SAM plays a very crucial role in the A SAM plays a very crucial role in the outcome of a CGE model outcome of a CGE model
As important as the final SAM is the As important as the final SAM is the procedure that generates it procedure that generates it
The quality of data and assumptions made The quality of data and assumptions made directly affect the results of the CGE directly affect the results of the CGE model model
Either input Either input-
output tables or national output tables or national
income and product accounts can be used income and product accounts can be used as a starting basis to generate a SAM as a starting basis to generate a SAM
Database Database
Ghadimi 2007; Regional Research InstituteGhadimi
2007; Regional Research Institute
Session Three: Implementation
Expenditures
Receipts
Activity
Commodity
Factors
Institutions
World
Activity
Domestic Supply
Exports
Commodity
Intermediateinputs
Final demand
Factors
Value added
Institutions
Factorincome
Inflows
World
Imports
Totals
Total costs
Total supply
Total factorincome
Domesticincome
ForeignExchangeinflow
Indirect taxesand tariffs
TransfersAnd taxes
Indirect taxes
Database Database
Ghadimi 2007; Regional Research InstituteGhadimi
2007; Regional Research Institute
Session Three: Implementation
Econometric estimation of a large Econometric estimation of a large
number of parameters in a CGE number of parameters in a CGE
model is a major task even when the model is a major task even when the
extensive time series data are extensive time series data are
available available
With a few exceptions, CGE models With a few exceptions, CGE models
determine parameters determine parameters
mathematically from a social mathematically from a social
accounting matrix accounting matrix
Ghadimi 2007; Regional Research InstituteGhadimi
2007; Regional Research Institute
Session Three: Implementation
Determines the set of parameters and Determines the set of parameters and exogenous variables so that the CGE exogenous variables so that the CGE model will replicate the economy model will replicate the economy represented in the SAM represented in the SAM
It is common to interpret flow entries in It is common to interpret flow entries in the SAM as a measure of both real and the SAM as a measure of both real and nominal magnitude by choosing a proper nominal magnitude by choosing a proper unit for all physical quantities so that the unit for all physical quantities so that the prices equal one. prices equal one.
Ghadimi 2007; Regional Research InstituteGhadimi
2007; Regional Research Institute
Session Three: Implementation
The solution of a CGE model can be The solution of a CGE model can be
formulated as a problem in finding a formulated as a problem in finding a
fixed point in a mapping of prices to fixed point in a mapping of prices to
prices through excess demand prices through excess demand
equations. equations.
Pioneered by Herbert Scarf Pioneered by Herbert Scarf
E.g. Scarf and Hansen. 1973. The E.g. Scarf and Hansen. 1973. The
computation of economic computation of economic equilibria
equilibria.
Yale Univ. Press. Yale Univ. Press.
Solution Strategy Solution Strategy
Ghadimi 2007; Regional Research InstituteGhadimi
2007; Regional Research Institute
Session Three: Implementation
Treat CGE model as a collection of Treat CGE model as a collection of
non non-
linear algebraic equations and linear algebraic equations and
solve directly with numerical solution solve directly with numerical solution
techniques. techniques.
Within this framework, there are Within this framework, there are
variations depending on how to solve variations depending on how to solve
the system. the system.
E.g. E.g. Adelman
Adelman and Robinson 1978
and Robinson 1978
Solution Strategy Solution Strategy
Ghadimi 2007; Regional Research InstituteGhadimi
2007; Regional Research Institute
Session Three: Implementation
Formulate the CGE model as a non Formulate the CGE model as a non-
linear programming model whose linear programming model whose
solution yields shadow prices that solution yields shadow prices that
can be interpreted as market prices. can be interpreted as market prices.
E.g. E.g. Ginsburgh
Ginsburgh and
and Waelbrock
Waelbrock 1981,
who also survey the other who also survey the other
techniques. techniques.
Solution Strategy Solution Strategy
Ghadimi 2007; Regional Research InstituteGhadimi
2007; Regional Research Institute
Session Three: Implementation
Fixed point algorithm died out Fixed point algorithm died out
quickly quickly
Empirically very inefficient and Empirically very inefficient and impractical impractical
The programming approaches little The programming approaches little
used used
Linearization (ORANI) and Linearization (ORANI) and
System of non System of non-
linear equations have linear equations have
prevailed. CGE model in prevailed. CGE model in
levels levels
Solution Strategy Solution Strategy
