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A Computable General Equilibrium Model

Author: JiaPeng
Tutor: ZhangShiWei
School: Jilin University
Course: Quantitative Economics
Keywords: Computable General Equilibrium Microsimulation Social Accounting Matrix Macro and Micro Linking
CLC: F224
Type: Master's thesis
Year: 2009
Downloads: 245
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With our country’s rapid economic growth and deepening reform, the equality of income distribution has attracted more and more people’s attention. Both the central government and local governments have implemented many income distribution adjusting policies in order to decrease income gap and promote a harmonious development of the society. But the design of income distribution policies must be supported by economic theory and what’s more important, it must be evaluated with empirical economic models. This is in fact to study the macroeconomic effect on micro individuals. In modern academic area, two kinds of models exist which can be use to evaluate income distribution policies: macroeconomic models represented by a computable general equilibrium model and microeconomic models represented by a microsimulation model.The first computable general equilibrium model was developed in the sixties of the twenties century. After that, it has been extensively used in the analysis and evaluation of international trade policies, environment policies, income distribution policies and many other economic policies. Computable general equilibrium models are supported by solid economic theory. And compared with partial equilibrium, they can be used more extensively in the analysis of the "general equilibrium" effects of economic policies.Microsimulation models were first developed by Professor Orcutt in 1957(Orcutt. 1957). It is a process of using computer to stimulate the economic system. During the process, micro individuals like a person, a household or an enterprise are described and handles. Microsimulation model is an effective tool in the analysis of public policies like income distribution policies. In China, due to the lack of micro data sets. the study of microsimulation has just started. Some scholars start to take advantage of microsimulation models in the analysis of income distribution policies, labor supply, education and medical insurance etc. Some initial results have been obtained.Computable general equilibrium models and microsimulation models both have their advantages as a tool for policy analysis. Computable general equilibrium models focus on the macroeconomic level. The analysis results of computable general equilibrium models have strong "general equilibrium" effects. Generally speaking, computable general equilibrium models can hardly be used to study the microeconomics effects of macroeconomic policies, because there are only limited numbers of representative households in computable general equilibrium models. The high aggregation of computable general equilibrium models means that they can not be used to identity the winners and losers of some specific policy reform. And due to this reason, computable general equilibrium models are not the appropriate tools to evaluate the effect on poverty and inequality of some specific policy. The forced use of this kind of models can lead to biased or wrong conclusions. That is to say the representative agent method used in computable general equilibrium models can not fulfill the requirements of heterogeneous individuals generally required in the income distribution relevant researches like income inequality. Microsimulation models focus on the micro level analysis. In microsimulation models, the properties and behaviors of micro individuals can be better described, which gives it a unique advantage to handle income distribution problems like income inequality. Most of the available economic models focus either on macroeconomic or on microeconomic. If we can find a method to link macroeconomic analysis and microeconomic analysis, we will be able to analyze the individual heterogeneity while at the same time considering the macroeconomic effects of policy reform and economic fluctuation. The results of this kind of analysis can be in no doubt are more convincing that sole macroeconomic or microeconomic analysis.At least three methods are available to link a computable general equilibrium model and a microsimulation model. The first approach is called full integration method. In this method, the feedbacks of microeconomic data directly go into a computable general equilibrium model. And it can be considered that there does not exist a real microsimulation module in this method and this method can not be used to predict the labor supply responses of household or individual. The remaining two methods are both layered methods, which are called top-down and top-down/bottom-up approach respectively. In more detail, we have to build a computable general equilibrium model and a microsimulation model respectively. And then link the two models by passing important information between the two models through some specific parameters and variables. The top-down approach links two models by a specific equation system. This equation system passes some variables or parameters (for example, prices) from computable general equilibrium models to microsimulation models. The top-down/bottom-up approach also considers the feedback effects of microsimulation models to computable general equilibrium models.A Social accounting matrix is a general description of the economic structure of a country or a region during some specific period. It puts the input-put table and macroeconomic accounts in a balanced and closed framework and provides the base data to analyze the whole economy of a country or region. It is also an empirical tool to study the inter-account effects of the whole economy. Based on the input-output table, a social accounting matrix incorporates information of many institutions, like household, enterprises, government and rest of the world, etc. It reflects the connections between production, activity and factor account. It covers four important chains of the economic activity, which are production, allocation, consumption and capital accumulation. The production sector make revenues by selling their products and these revenues are used to pay consumption account, which is factor payment. Part of the income of consumption account is used to consume products and the other part is deposited. In capital account, deposit is transformed into investment demand. The income and expenditure of the whole macro economy is obvious. By studying the changes in the income and expenditure of these accounts, we may analyze the general effects of some economic policies on the economy, which can facilitate the research and stimulation of economic policies. The divide of the accounts has much flexibility. To obtain a social accounting matrix which satisfies our research, the commodity, activity and capital accounts can be divided or aggregated according to specific problems under study. A social accounting matrix can be built based on the input-output table and macroeconomic data. A social accounting matrix is the foundation of a computable general equilibrium model.A computable general equilibrium model has to explain all the payments in a social accounting matrix, so a computable general equilibrium model has to follow the disparity of the social accounting matrix in terms of activity, commodity, factor and institution etc. The form of a computable general equilibrium model is a set of simultaneous equations, many of which are non linear. There is no objective function in the model. These equations define the behaviors of different accounts. These behaviors all follow simple rules described by fixed coefficients. The optimal behaviors of production and consumption are set by non linear first order conditions, which are production and consumption are determined by maximum profits and utilities. Some constraints are included in these equations. A single account or individual doesn’t have to satisfy these constraints, but the whole equation system has to satisfy these constraints. The computable general equilibrium models in this paper are divided into four modules, which are price block, production and trade block, institution block and system constraint block. Most of the parameters in the computable general equilibrium model is determined by using a method called calibration.Using the computable general equilibrium model, I analyze the affect of the 10% increase in all import commodities on the economy. The results indicate that the increase of all import commodities has a negative effect on the economy. The gross domestic product decreases by 3%. And total outputs in all other sectors except industry tend to decrease. As a result of the price increase in import commodities, commodities in all sectors of the economy all decreases. The labor demands in all other sectors except industry sector tend to decrease and labor force tends to flow into the industry sector.

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