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Introduction to Computable General Equilibrium Models
Computable general equilibrium (CGE) models are widely used by governmental organizations and academic institutions to analyze the economy-wide effects of events such as climate change, tax policies and immigration. This book provides a practical, how-to guide to CGE models suitable for use at the undergraduate college level. Its introductory level distinguishes it from other available books and articles on CGE models. The book provides intuitive and graphical explanations of the economic theory that underlies a CGE model and includes many examples and hands-on modeling exercises. It may be used in courses on economics principles, microeconomics, macroeconomics, public finance, environmental economics and international trade and finance, because it shows students the role of theory in a realistic model of an economy. The book is also suitable for courses on general equilibrium models and research methods and for professionals interested in learning how to use CGE models.
eBook
Integrating a computable general equilibrium model with the four-step framework
In the transport policy development process, four-step models are commonly used to estimate transport costs and flows based on representations of travel demands and networks. However, these models typically do not account for broader changes in the economy, which may significantly shift travel patterns in the case of larger transport projects. LUTI models are often applied to simulate changes in land-use patterns, and regional production function models have been used to estimate changes in production, but these methods rely on fixed economic parameters that may not capture the structural economic changes induced by large transport projects. In a separate line of development, computable general equilibrium (CGE) models, which simulate entire economies, have been increasingly applied to estimate the magnitude and distribution of economic impacts from transport improvements both spatially and through markets, including GDP and welfare. Some CGE models are linked with transport network models, but none incorporate detailed networks or generate a complete set of travel demands. This paper presents an integrated CGE and transport model that generates household and freight trips and simulates a detailed road network for different time periods, such that the transport submodel can be calibrated and run as a conventional transport model. The model provides a tool for the rapid strategic assessment of transport projects and policies when economic responses cannot be assumed to remain static. In the model, the CGE submodel simulates the behaviour of households and firms interacting in markets, where their behaviour takes trip costs into account. The model then generates trips as a derived demand from agent activities and assigns them to the road network according to user equilibrium, before feeding back trip costs to the CGE submodel. The model is then tested by simulating the WestConnex motorway project under construction in Sydney, with results showing significant increases in welfare for regions close to the improvements. Further development of the model is required to incorporate land-use and mode choice.
Journal Article
The Ex-Ante Evaluation of Achieving Sustainable Development Goals
This paper describes the methodology and main results from an overall assessment on future achievement of sustainable development goals. The proposed approach consists of a model-based, looking forward composite sustainable development index—FEEM sustainability index—projected to the future. It represents a first experiment to reproduce the future dynamics of sustainable development indicators over time and worldwide and to assess future sustainability under different scenarios. The assessment presented here is relevant under different viewpoints. First, it has a very broad nature in terms of both geographical coverage and meaningfulness: it considers the multi-dimensional structure of sustainable development by combining relevant indicators belonging to economic, social and environmental pillars for the whole world. Second, the modelling framework to compute future trends of indicators relies upon a recursive-dynamic computable general equilibrium model. This is an ideal tool to look simultaneously at the development of many indicators, their potential interactions and trade-offs, and more in general to the consequences of economic development and/or policies aiming to increase performance in one or more indicators; it allows measuring the overall sustainability under alternative scenarios, across countries and over time. Finally, regarding the construction of the composite indicator, the application of fuzzy measures and Choquet integral increases substantially the model capability allowing taking into account the interactions that exist among the three main pillars of sustainability and the considered indicators.
Journal Article
The economic damage of COVID-19 on regional economies: an application of a spatial computable general equilibrium model to South Korea
We developed a spatial computable general equilibrium model of South Korea to assess the spatial spillover effects of the COVID-19 pandemic on South Korea’s regional economic growth patterns. The model measures a wide range of economic losses, including human health costs at the city and county level, through an analysis of regional producers’ profit maximization on the supply side and regional households’ utility maximization on the demand side. The model’s findings showed that if the level of spatial interaction decreases by 10% as a result of social distancing policies, the national gross domestic product drops by 0.815–0.864%. This loss in economic growth can be further decomposed into 0.729% loss in agglomeration effect, 0.080–0.130% loss in health effect associated with medical treatment and premature mortality, and 0.005% loss in labor effect. The results of the models and simulations shed light on not only the epidemiological effects of social distancing interventions, but also their resultant economic consequences. This ex-ante evaluation of social distancing measures’ effects can serve as a guide for future policy decisions made at both the national and regional level, providing policymakers with the tools for tailored solutions that address both regional economic circumstances and the spatial distribution of COVID-19 cases.
Journal Article
A Dynamic Baseline Calibration Procedure for CGE models
Baseline assumptions play a crucial role in conducting consistent quantitative policy assessments for dynamic Computable General Equilibrium (CGE) models. Two essential factors that influence the determination of the baselines are the data sources of projections and the applied calibration methods. We propose a general, Bayesian approach that can be employed to build a baseline for any recursive-dynamic CGE model. We use metamodeling techniques to transform the calibration problem into a tractable optimization problem while simultaneously reducing the computational costs. This transformation allows us to derive the exogenous model parameters that are needed to match the projections. We demonstrate how to apply the approach using a simple CGE and supply the full code. Additionally, we apply our method to a multi-region, multi-sector model and show that calibrated parameters matter as policy implications derived from simulations differ significantly between them.
Journal Article
Impacts of demand and supply-side interventions on South Korea’s housing markets: a dynamic housing-CGE analysis
This paper examines the impacts of housing market policies in Korea by developing a dynamic computable general equilibrium model integrating regional housing markets and multiregional mobility. We compare simulation outcomes of demand- and/or supply-side approaches in housing market interventions and address how these various policy instruments affect housing prices, demand, and household welfare. Policy simulation results suggest that supply-based interventions would be more effective than housing tax policies for cooling down overheated housing markets without decreasing consumer welfare. Tax-based demand-side approaches result in a 1.8–2.2% housing price drop and a 1.1–1.2% welfare decline annually between 2021 and 2024. In the supply-side policy, investing in housing construction leads to 3.4–4.1% lower housing prices and 1.5–1.8% enhanced welfare.
Journal Article
Study on Economic Impact of Guizhou Tourism Business Environment Based on CGE Model
With the development of the domestic economy, especially since the 11th Five-Year Plan period, the Guizhou tourism industry has welcomed development opportunities and rapid growth. Tourism has become the pillar industry of Guizhou and explores how to transform from a large tourism province to a strong tourism province. This paper aims to study the economic impact of the Guizhou tourism business environment based on the computable general equilibrium (CGE) model. Along with that, this study also analyzed the economic impact of the tourism business environment in Beijing and Shanghai. From the perspective of input and output, this paper regards the tourism business environment as a constraint for the development of tourism, and affects the output level of tourism activities. Considering the future changes in the comprehensive technical efficiency of Guizhou tourism, we use the CGE model to simulate the economic impact of the future tourism business environment. The study found that different business environments have a significant impact on Guizhou’s macroeconomy and tourism-related sector economy. This article contributes to further studies analyzing the economic impact of the tourism business environment. Even the slightly deteriorating tourism business environment may have a great negative economic impact, which provides a theoretical basis for the urgency of continuously improving the tourism business environment.
Journal Article
The Economy-Wide Impact of Subsidy Reform: A CGE Analysis
Oil prices fell from around $US110 per barrel in 2014 to less than $US50per barrel at the start of 2017. This put enormous pressure on government budgets within the Gulf Cooperation Council (GCC) region. The focus of GCC economic policies quickly shifted to fiscal reform, including the removal of domestic subsidies on energy products. In this paper, we use a dynamic Computable General Equilibrium (CGE) model to investigate the economic impact of the gradual removal of subsidies on refined petroleum and electricity, with specific reference to the Kingdom of Saudi Arabia (KSA). Our study shows that removing subsidies eliminates a large distortion in the economy. This improves the efficiency of resource use, so that even though employment and capital in most years fall relative to baseline levels, real GDP rises. In addition, we show that fully-funded compensation payments offset the increases in energy prices, leaving economic welfare of the Saudi-national population little affected. Removing the energy subsidies leads to an improvement in the net volume of trade, while leading to a mixed outcome for industries.
Journal Article