A Market with Autonomous Economic Decision Makers: Features of the CGE Model
Alternative to the standard linear programming model in the previous chapter, where the central planner is the maximising actor, economic models have been developed that attempt to capture the endogenous role of prices and the workings of the market syste
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A Market with Autonomous Economic Decision Makers: Features of the CGE Model
Alternative to the standard linear programming model in the previous chapter, where the central planner is the maximising actor, economic models have been developed that attempt to capture the endogenous role of prices and the workings of the market system, where the essence of the general equilibrium problem is the reconciliation of maximising decisions made separately and independently by various actors. The objective of this literature is to convert the Walrasian general equilibrium structure, from an abstract representation of an ideal economy (Arrow and Debreu model 1954) into numerical estimates of actual economies. In the construction of applied general equilibrium models two different approaches must be emphasised.1 On one hand, the computable general equilibrium (CGE) models introduced by Adelman and Robinson (1978), extending the approach of Johansen (1960),2 which, given a set of excess demand equations, simulate the behaviour of producers and consumers to study the competitive adjustment mechanism of a system of interdependent markets. One the other hand, the activity analysis general equilibrium (AGE) models introduced by Ginsburgh and Waelbroeck (1975) and Manne (1977), which are characterised by inequality constraints and specified as a mathematical programming problem to examine the optimisation solutions of which are a competitive equilibrium. The linear programming model, based on the traditional Koopmans activity model, was presented in the previous chapter. Now, we will present the basic features of the CGE-model.
1 See Bergman (1990) for a survey of the development of the computable general equilibrium model. See also Borges (1986). 2 The first successful implementation of an applied general equilibrium model is due to the pathbreaking study by Johansen (1960) of the Norwegian economy. Johansen retained the fixedcoefficients assumption in modeling intermediate demand, but employed Cobb-Douglas production functions in modeling the substitution between capital and labour services and technical change.
R. Nore´n, Equilibrium Models in an Applied Framework, Lecture Notes in Economics and Mathematical Systems 667, DOI 10.1007/978-3-642-34994-2_4, # Springer-Verlag Berlin Heidelberg 2013
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4 A Market with Autonomous Economic Decision Makers: Features of the CGE Model
4.1
The Basic Structure
Rather than being a single maximisation problem, the CGE model involves the interaction and mutual consistency of a number of maximisation problems separately pursued by a variety of economic actors. The problem involves the reconciliation of distinct objectives and not only the maximisation of a single indicator of social preference.3 As we know from Chap. 2, the duality theorem ensures that the objective function of the dual will equal, at optimum, the objective function of the primal. Thus, an overall budget constraint is satisfied. Nothing guarantees, however, that the budget constraints of the individual actors in the e
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