introduction to computable general equilibrium model (cge)24 wrap up incorporating the trade...
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Introduction to Computable General Equilibrium Model
(CGE)
Dhazn Gillig&
Bruce A. McCarl
Department of Agricultural EconomicsTexas A&M University
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Course Outline
Overview of CGE
An Introduction to the Structure of CGE
An Introduction to GAMS
Casting CGE models into GAMS
Data for CGE Models & Calibration
Incorporating a trade & a basic CGE application
Evaluating impacts of policy changes and casting nested functions & a trade in GAMS
Mixed Complementary Problems (MCP)
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This Week’s Road Map
Incorporating a simple trade relationship in a
CGE model
SAM in GAMS
Calibration in GAMS
Basic CGE application (Shoven & Whalley)
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Incorporating Trade – modifications to a basic CGE model
Basic relationships for a simple CGE model1. Supply–Demand2. Zero profit condition3. Factor demand by producers4. Product demand by households5. Income balance constraint for households6. Government balance7. Trade Balance
assumption:- Small open-economy- Only goods are tradable.- Goods are homogenous across countries
(ignore the CET and ARMINGTON approaches for now)
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1. The commodity market balance
jjjjj1
jjh
jh PRsQQaX /11, +−+∑∑
Incorporating Trade – modifications to a basic CGE model
jP≤0 ⊥
2. The factor market balance => no change (assuming no trade on factors)
3. The profit condition=> no change
4. The household income equation=> no change
jj QImpQExp −+ j
∀≤ 0
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5. The government tax revenue balance
∑∑ −+−≤h
hhKhLhj
jjj FKWLWtQPtR )(
( ) ∑ ++j
jKkjjLlj KWtLWt
R≤0 ⊥
∑∑∈∈
++imj
jjjexj
jjj PQImptImpPQExptExp
Incorporating Trade – modifications to a basic CGE model
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6. The domestic (US) trade price equations
Exports:
exjTransCostExchangePWExpPExp jj ∈∀−×≤ )(
jPWExp≤0 ⊥
jPWImp≤0 ⊥
imjTransCostExchangePWImpPImp jj ∈∀+×≤ )(
Imports:
Incorporating Trade – modifications to a basic CGE model
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7. The domestic (US) trade quantity equations
Exports:
exjPWExpfQExp jj ∈∀≤ ),( ε
jQExp≤0 ⊥
jQImp≤0 ⊥
Imports:
imjPWImpfQImp jj ∈∀≤ ),( µ
where ε and µ are price elasticities
-INF < ε < 0 and 0 < µ < INF
Note: Shoven and Whalley showed that ε < -1 so that the export-demand curve slopes downward and the import-supply slopes upward.
Incorporating Trade – modifications to a basic CGE model
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Incorporating Trade – modifications to a basic CGE model
8. The domestic & trade price relationshipExport tax => price received by domestic producers from
exports NOT = from domestic goodsImport tax => price paid by domestic consumers for imports
NOT = for domestic goods
jPExp≤0 ⊥
jPImp≤0 ⊥Imports:
exjPtExpPExp jjj ∈∀−= )1(
imjPtImpPImp jjj ∈∀+= )1(
Exports:
9. The zero trade balance : The exchange rate is used to clear a market where values of
imports are equal to values of exports.
Exchange≤0 ⊥ ∑∑∈∈
≤exj
jjimj
jj QExpPWExpQImpPWImp
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SAM
Recall: SAM Table used in the class example last week
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SAM in GAMS
STEPS entering SAM Table in GAMS
1. Define SETS and elements of SETS
2. Create SUBSETS from SETS
3. Enter data using a TABLE statement
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SAM in GAMS
STEP 1: Define SETS and elements of SETS
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SAM in GAMSSTEP 2: Create SUBSETS from SETS
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SAM in GAMSSTEP 3: . Enter data using a TABLE statement
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Calibration in GAMS
Using GAMS to check if SAM accounts are balanced before
starting a calibration
=> a column sum = a row sum
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Calibration in GAMS
Output from GAMS
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Creating a parameter to flag on accounts that are not balanced
Calibration in GAMS
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Calibration in GAMS
STEPS used in a calibration:
(1). Define parameters used in a calibration
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Calibration in GAMS
(2). Decide on units for goods and factors so that prices and quantities are separately obtained.
Normalizing prices to unity
Modifying SAM TABLE so that units are in quantities
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Calibration in GAMSRecall: The numerical example for the Cobb Douglas
production function used last week αα −= 1FFFF LKAQ
25.0120013001
=××
==FF
FFF QP
Krα
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Calibration in GAMS
75.1900300
120075.025.01 === −αα
FF
FF LK
QA
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Calibration in GAMSReplication check after a calibration
120090030075.1 75.025.0
1
=××== −
ααFFFF LKAQ
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Calibration in GAMS
300175.0125.0
75.11200
)1(75.0
1
=
××
=
−
=−α
αα
rw
AQKF
FF
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Wrap Up
Incorporating the trade relationship in the CGE model SAM in GAMSCalibration in GAMS
Next:MCPEvaluating results from the CGE modelIncorporating nested functions and a trade in GAMSManne A. S. and R. G. Richels. “An alternative approach to establishing trade-offs among greenhouse gases.” Nature410, 675-677 (2001).
Reference:Shoven, J. B. and J. Whalley. “Applying general equilibrium.” Surveys of
Economic Literature, Chapter 7, 1998.