Global Computable General Equilibrium and Partial Equilibrium Models
Global Computable General Equilibrium and Partial Equilibrium Models: CGE/PE Sherman Robinson International Food Policy Research Institute (IFPRI) Bioversity Workshop, Rome, May 7 -8, 2015
CGE and PE Model Families • Relative strengths of different global models with an agricultural focus: CGE and PE models – Relevance for issues of biodiversity and ecosystem services in Foresight Models • Exploiting comparative advantages of different model systems – Modularity within and between model families – “Soft” and “hard” linking different models • Data bases: estimation and management 2
Global CGE Models: GLOBE/MIRAGE • Global CGE models simulate the interaction of national economies across world markets – Determine national and world market prices • CGE models are “complete”: they incorporate all economic activity in the economies simulated – Production (supply), income to “agents” (households, govt. , enterprises), demand (C, I, G), exports/imports, prices, wages, land rents, exchange rates – Markets “clear”: supply/demand equilibrium conditions determine prices, wages, profits, land rents 3
CGE: Circular Flow of Income Factor Markets Factor Costs Producers Demand for Intermediate Inputs Sales Revenues Exports Domestic Private Savings Wages & Rents Gov. Savings Taxes Households Government Saving/INV Transfers Product Markets Private Consumption Government Expenditure Investment Demand for Final Goods Imports Rest of the World Foreign Savings 4
CGE: Deep Structural Models • Includes “representative” economic agents: – Utility-maximizing consumers (households) • Expenditure functions, given budget constraints – Profit-maximizing producers • Maximize profits given technology and prices • Yields factor demands, given wages and prices • Wages/prices are “signals” on all markets • Market “institutions”: competitive markets with agents who cannot manipulate prices – Supply=demand determines prices 5
CGE: Completeness • CGE models are “closed” in the sense that they account for all economic activity: no “leakages” • SAM accounting framework: describes the economic “universe” of the models – Double-entry bookkeeping: expenditure/receipt accounts of all economic agents must balance • General equilibrium theory/practice: powerful discipline for modelers 6
CGE: “Equilibrium” as Descriptive • CGE models impose strong market equilibrium conditions: – Supply = demand in product and factor markets • If these equilibrium conditions are “descriptive” or “realistic”, then the model solution is realistic – Fundamental to lots of economics – Advantage: do not have to describe the process by which equilibrium is achieved, just the solution 7
CGE: Direct and Indirect Effects • PE models (GLOBIOM, IMPACT) are “partial” and do not include links between agricultural and non -agricultural sectors • CGE models include all direct/indirect links across the economy: PE models miss them – Indirect effects (forward and backward linkages) are empirically important • Shocks to agriculture “leak” to the rest of the economy: prices and factor flows 8
CGE/PE: Welfare Analysis • PE models: “welfare” effects are measured by changes in consumer and producer surplus: – Areas under supply and demand curves – OK for single markets, questionable for multi-markets • CGE models: “completeness” makes welfare calculation easier and theoretically well grounded – Changes in “absorption” or utility measures (EV/CV) • CGE: utility and complete expenditure functions • PE: simple “reduced-form” demand curves 9
CGE/PE: Production • CGE models: technology specified wit smooth neoclassical production functions (CES, nested) – Yield complete cost functions—all input costs included – “Deep structural”: technology, motivation (profit maximization) , and “signals” (prices) are all specified – Problem: for agriculture, nested CES functions are not viewed as “realistic” specification of technology • PE models: focus on land seeds—area/yield specification of production technology 10
PE: Production/Supply • GLOBIOM: “Deep structural” specification of production. Activity analysis specification of technology determining areas and yields • IMPACT: “Reduced form” specification, with price -responsive demand/supply functions of land crop yields. More aggregated than GLOBIOM • Both PE models use crop simulation models (DSSAT/EPIC) to specify underlying biology of crop response to “shocks” (temperature/water) 11
PE Model System: Modularity • IMPACT 3 is a suite of linked models – Core PE, multi-market model of global production, demand, and trade – Water models: (1) hydrology, (2) water basin management, and (3) water stress response • Models run on a monthly time step, then linked to the core multi-market model – Livestock model: Value chain from herds to meat • Many livestock production systems 12
PE Model System: Modularity • Land use: (1) Allocation of land to different uses (pasture, forest, irrigated crop, rain-fed crop), (2) Allocation of different crops to irrigated and rainfed crop land • Sugar value chains: sugar cane and beet to processed sugar • Oil seeds value chains: oil seeds to oils and meals • Fisheries 13
PE Models: Agricultural Detail • The PE models provide much more disaggregated description of agriculture than the CGE models – Regional, land, and crop disaggregation – Focus on crop inputs and biology: seeds, water, light, heat, nutrients: process technologies • Better host for analysis of issues of biodiversity and ecosystem services – Links to land use models 14
CGE/PE: Modularity and Linkages • Potential for “soft” and “hard” linking of different model families: CGE/PE • CGE models to include ag/non-ag linkages, income flows, and welfare analysis, • PE models to specify agricultural production technology in detail • Communication between the models 15
Thank you S. Robinson@cgiar. org 16
- Slides: 16