F R E I G H T T R A N S P O R T M O D E L I N G

( C I V L 7 9 0 9 - 8 9 0 9 )

D E P A R T M E N T O F C I V I L E N G I N E E R I N G

U N I V E R S I T Y

U N I V E R S I T Y O F M E M P H I S

1

Computable General Equilibrium

Models- Part 1

09/05/2014

Material2

Materials used in today’s lecture are from

Burfisher M.E., Introduction to Computable General Equilibrium Models, Cambridge University Press, 2011

Hosoe N.M. Gasawa K., Hashimoto H., Textbook of Computable General Equilibrium Modeling, Palgrave

Macmillan, 2010

Topics3

What is CGE Models and Modeling

Elements of CGE Models

What is CGE4

System of equations Describe an economy

Interactions among parts of the economy

Equations: Derived from macro and micro economic theory

Like any other model Exogenous (a.k.a. parameter) and endogenous (a.k.a. decision

variables controlled by the model) variables

Market constraints

Equilibrium formulas or optimization programs

Computable-G-E5

Computable: Capability to quantify effects of a shock on an economy

Example: What is the outcome of reducing U.S. tariff for imports

Qualitative: Increase of import demand, decrease of domestic demand

Quantitative (computable): Use data to actually measure the effects not only on demand for import products but also on the whole economy (i.e. sectors that produce same goods as imports, sectors that provide them with material etc)

C-General-E6

General: Encompasses all economic activity and linkages

Production

Consumption

Employment

Taxes

Savings

Trade

Fuel Price Change

Price of Goods

Increase

Demand Decrease

Change in employment, taxes, savings

Change in trade flow,

exchange rate

Effects world economy

C-G-Equilibrium7

Producers: Maximize efficiency

Given input costs (fuels, sale price, technological constraints) find output products that maximize efficiency (some objective function)

Note: No profit is allowed (savings and investment is)

Consumers: Maximize utility

Given input costs and salary find bundle of goods that maximizes utility

CGE Component Interrelationships8

1. Firms produce products to meet demand

1. Purchase material

2. Purchase factors (labor, capital) & pay wages and rent

2. Household income from firms is spent on

1. Goods and services

2. Taxes

3. Savings and Investments

3. Tax revenue for the government

1. Purchase factors & invest

4. Investors use savings to buy capital

Circular flow diagram of the economy

Source: http://www.ifpri.org/sites/default/files/publications/sp5.pdf

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Toy Partial Equilibrium Model10

Cost to build a bike: C

Price to sell a bike: P

Income of people buying a bike: Y

Quantity of bikes produced: Q=F(C, P)

Demand for bikes: D=G(Y, P)

Equilibrium condition: D=Q

CGE Database-111

Social Accounting Matrix (SAM)- see gtap.org

Describes flow of income and spending during a specific time period

Reports on

Values of good and services produced

Income generated from sales

Household income and spending

Government tax and revenue

Savings and investment spending

International trade

CGE Database-212

Aggregate data Industries are grouped

Agriculture Manufacturing Services

Household transactions Household type Income Location Demographics

Goods and services Food Manufacturing Services

More on SAM later on

Model Application13

Beginning

Tax policies (developed countries)

Development policies (developing countries)

Since 1990

Trade among regions

Climate change and evaluation of mitigation strategies

Consumer aversion to genetically modified goods

……………………….

Elements of CGE-114

CGE Models is a set of equations and optimization models

Variables (exogenous, endogenous and model closure)

Exogenous: fixed values (inputs to the model)

Example: Labor supply assumed constant

Endogenous: determined as solutions

Example: Price and quantity of goods

Closure: Decision on exogenous and endogenous

Elements of CGE-215

Exogenous parameters

Tax and tariff rates (typically calculated by the CGE model from the base data)

Example: tariff rate= value of tariff revenue/value of imports

Elasticities of demand and supply

Supply Elasticities:

Factor substitution (e.g. labor vs capital-equipment or technology)

Factor mobility (e.g. worker moves to another region due to higher salaries)

Export transformation (e.g. ability to transform products between products for domestic vs. export demand)

Elements of CGE-316

Elasticities of demand and supply

Demand Elasticities:

Income elasticity of demand: change in demand from change in income

Own and cross-price elasticity: consumer demand change due to price change

• Own: the same product

• Cross: between products

Complement (negative), independent (zero), substitute (positive elasticity)

• Import substitution: shift between imported and domestic products

• Export demand: change of export demand to the rest of the world

Elements of CGE-417

Shift and share parameters

Parameters used in the supply and demand functions of CGE models

Example: Cobb-Douglas function

A: Shift parameter-productivity of K (capital) and L (labor)

a: Share parameter: share of K and L in productivity Hint: a is an elasticity

)( 1 aaLKAOutput

Elements of CGE-518

Model Calibration: Calculate shift and share parameters to match initial equilibrium

Equations

Behavioral: Economic behavior of producers, consumers and other agents (e.g. supply and demand equations, utility functions of customers for different goods)

Identity: Define a variable as a function of other variables (think of it as auxiliary variable definitions)

Example: Market clearing identity equation from GTAP

jfjff qfeSHRq ,,

f: mobility factor, qf: change in national supply, SHR: industry j share in national

employment of factor f (a.k.a. weight), qfe: % change in demand for factor f in industry j

Elements of CGE-619

Macroclosure (its an equation)

Decision about which of the two macroeconomic variables (savings or investment) to adjust to maintain equilibrium

Example: GTAP uses savings rate as exogenous and investment as endogenous

Total Savings=Total Investment

Elements of CGE-720

How will a macroclosure decision effect results

Example 1: Savings exogenous Increase in income will result in increased savings

Increased savings will increase investment

Most likely increase in production of machinery and equipment

Example 2: Investment exogenous Increase in income results in no change of savings

Increase is spending

Most likely lead to an increase in demand of consumer goods (apparel, groceries, electronics) import and/or domestic

Elements of CGE-821

CGE databases do not provide quantity flows (only $$$$$$)

Reduces information needed to build CGE model

We do need to report both quantities and values

Solution: Normalizing prices (quantity per 1 unit of currency)

Convert initial (or base) prices into $1 (or one unit of the currency used say drachma)

Base values of shoes 50% increase in shoes quantity

Price Quantity Value Price Quantity Value

Actual Data 0.5 6 3 0.5 9 4.5

Norm. Price Q/price Value Norm. Price Q/price Value

Normalized Data

1 3 3 1 4.5 4.5

Elements of CGE-922

CGE models report several prices of a product along the supply chain

How do we keep track of the change in price along the supply chain

Price linkages Producer price

Consumer price

Bilateral import price (exporter price + trade margins)

Bilateral export price (exporter domestic product price + export tax)

Elements of CGE-1023

Structure of CGE model

Step 1: Define sets, parameters, variables and equations

Assign values to elasticity parameters and initial values to variables from the database

Calculate tax rates, calibrate shift/share parameters

Solve model

If results match base case end else calibrate

Next time24

Social Accounting Matrix

A simple CGE model Households

Firms

Market

No time-related elements (investment and savings)

Close economy (no international trade)

What is a Spatial Computable General Equilibrium model

F R E I G H T T R A N S P O R T M O D E L I N G

( C I V L 7 9 0 9 - 8 9 0 9 )

D E P A R T M E N T O F C I V I L E N G I N E E R I N G

U N I V E R S I T Y

U N I V E R S I T Y O F M E M P H I S

25

Computable General Equilibrium

Models

09/05/2014

26