Textbook of Computable General Equilibrium

Computable General Equilibrium (CGE) models have been widely used for various economic simulations, such as, trade liberalization, environmental problems, and regulatory and tax reforms. CGE models are powerful but tend to be large-scale and, therefore, often difficult to learn. This book provides a comprehensive A-to-Z guide for CGE models. Focusing on its practical application, readers can learn from the simplest CGE models, and proceed, in a step-by-step manner, to database construction, programming for computation, and developing more elaborated CGE models, which can be applied empirically to actual simulation purposes. Particular emphasis is placed on computer programs of CGE models. Readers can obtain knowledge and skills from which they can develop and operate their own CGE models, and apply them to their research. This book is essential reading for all interested in computational economics, advanced macroeconomics, international trade, regional development, development economics.

NOBUHIRO HOSOE earned a Ph.D. in Economics at Osaka University and has been an associate professor at Japan's National Graduate Institute for Policy Studies since 1999. He has developed computable general equilibrium models and other simulation models to empirically investigate impacts of trade liberalization and regulatory reforms in public utilities.

KENJI GASAWA has been a researcher at Research Institute, National Rehabilitation Center for Persons with Disabilities since 2001. He has analyzed the effects of social security expenditures on social welfare using computable general equilibrium models and other simulation models.

HIDEO HASHIMOTO is Professor Emeritus of Osaka University, and has been engaged in economic analysis of developing countries at the World Bank for more than ten years, using various macroeconomic models. He has also taught development economics at Osaka University.

Abbreviations	p. x
Symbols in CGE Models	p. xii
Tables, Figures and Lists	p. xv
Preface	p. xviii
Overview	p. 1
Economic analysis with computable general equilibrium models	p. 1
Framework of CGE models	p. 3
Advantages and shortcomings of CGE models	p. 5
Applications of CGE models	p. 6
Aims of this book	p. 6
Software and simulations on the PC	p. 8
Structure of this textbook	p. 10
The Simple CGE Model	p. 13
Setup of the economy	p. 14
Household behaviour	p. 15
Firm behaviour	p. 16
Market-clearing conditions	p. 18
Model system	p. 19
Computation	p. 23
Example: the 'household utility maximization model'	p. 23
Formulation of the model	p. 24
Specifying coefficients and exogenous variables	p. 25
Computational procedures	p. 25
Preparing input files	p. 27
Structure of input files and general syntax of GAMS	p. 27
Directives	p. 29
Results of computation in the output file	p. 36
The Social Accounting Matrix	p. 41
Structure of social accounting matrix	p. 42
Social accounting matrix for the simple CGE model	p. 42
SAM for the standard CGE model	p. 44
Construction of social accounting matrix	p. 47
Example: Social accounting matrix for Japan	p. 50
Consistency among various databases and matrix adjustment for a SAM	p. 56
Calibration and Computational Strategy for General Equilibrium	p. 61
The basic concept of calibration	p. 61
Value, price and quantity	p. 63
Calibration procedure - mathematical manipulation	p. 64
The case without indirect taxes	p. 64
The case with indirect taxes	p. 69
GAMS programming	p. 70
Programming procedures and an input file	p. 70
Declaration and definition of sets	p. 73
Installation of the SAM	p. 74
Retrieval of data from the SAM	p. 75
Calibration	p. 76
Specifying and solving the CGE model	p. 78
Initial values for numerical computation	p. 78
Uses of lower bounds	p. 79
Choice of numeraire	p. 80
Solution of the simple CGE model	p. 80
The Standard CGE Model	p. 87
Overview of the standard CGE model	p. 87
Intermediate inputs	p. 89
Government	p. 92
Investment and savings	p. 93
Introduction of investment and savings	p. 93
Modification of household and government behaviour	p. 95
International trade	p. 96
Small-country assumption and balance of payments	p. 96
Armington's assumption	p. 97
Substitution between imports and domestic goods	p. 98
Transformation between exports and domestic goods	p. 99
Market-clearing conditions	p. 102
Model system	p. 103
GAMS programming	p. 106
Declaration of sets, installation of the SAM and derivation of the initial equilibrium values	p. 112
Calibration	p. 114
Model solution	p. 118
Macro Closure	p. 122
Investment and savings-macro closure in a closed economy model	p. 123
Current account balance-macro closure in an open economy model	p. 125
Other closure rules	p. 127
Simulating General Equilibria	p. 128
Multiple runs in one input file	p. 129
Computation of indicators from solved values	p. 131
Measurement of economic welfare	p. 133
Sensitivity analysis	p. 137
The concept of sensitivity analysis	p. 137
Example of sensitivity analysis with the standard CGE model	p. 138
Sensitivity analysis with a three-sector model	p. 139
Interpretation of Simulation Results	p. 144
One-sector model	p. 145
A small open economy	p. 145
Impact of import tariffs	p. 149
Impact of transfers from abroad	p. 151
Impact of terms of trade shock	p. 152
Two-sector model	p. 153
Model Extension	p. 158
Multihousehold model	p. 158
Large-country model	p. 161
World trade model	p. 167
Two-country model	p. 167
Multicountry model	p. 174
Imperfect competition model	p. 176
Monopoly model	p. 176
Oligopoly model	p. 182
Quantitative restrictions	p. 182
Increasing-returns-to-scale model	p. 187
Concluding Remarks	p. 191
Extensions inside the CGE models	p. 191
Extensions outside the CGE models	p. 192
Concluding remarks for better CGE modelling	p. 193
Derivation of Household Demand Functions	p. 195
Competitive Equilibrium vs Social Optimum	p. 196
Utility Maximization and Lagrange Multipliers	p. 199
Reformulation of a System of Simultaneous Equations into an Optimization Problem	p. 200
Leontief-type Function and Optimization	p. 202
Advanced Uses of GAMS	p. 204
Set	p. 204
Sequence in a set	p. 204
Alias of a set	p. 204
Subset	p. 205
Setting values with formula	p. 205
Large Table data input	p. 206
Output file	p. 207
Printing variables and constants	p. 207
Suppressing output	p. 208
Communicating with spreadsheet software	p. 208
Transfer of data in an input file into a spreadsheet	p. 209
Transfer of data from a spreadsheet into a GDX file	p. 211
How to Cope with Errors and Infeasibilities	p. 213
Case 1: Compilation error	p. 213
Case 2: Execution error and Case 3: Solve error	p. 216
Case 4a: No base run equilibrium solution	p. 220
Case 4b: No counterfactual equilibrium solution	p. 221
Case 5: Incorrect solution	p. 222
Capacity limitation of GAMS	p. 222
Web Resources	p. 224
References	p. 226
Index	p. 229
GAMS Index	p. 234
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Textbook of Computable General Equilibrium Modeling Programming and Simulations

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