Back to the CGE Mini Model
This chapter, a continuation of Chap. 5, uses the ideas of endogenous obsolescence from Chap. 6 and adapts them to the CGE mini model. In this chapter the feature of endogenous obsolescence is included in the equation representing depreciation expenditure
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Back to the CGE Mini Model
This chapter, a continuation of Chap. 5, uses the ideas of endogenous obsolescence from Chap. 6 and adapts them to the CGE mini model. In this chapter the feature of endogenous obsolescence is included in the equation representing depreciation expenditure. In that sense, the endogenous transformation process is introduced in the CGE mini-model. In short, the focus of this chapter is to provide examples of structural transformation in an open economy. Thus, the model specification is here, as in Chap. 5, that the total investment equation is determined by total saving, and the allocation to the different industry sectors are influenced by the sector specific rate of return, but now also in terms of endogenous obsolescence.
7.1
The New Specification
We now have to insert the sector ratio of foreign capital rent to domestic capital rent and the exchange rate (and its adherent elasticity coefficients), according to the discussion in Chap. 6, in the following equation of total depreciation expenditure (5.32), thus: DEPRECIA ¼
Σj ; DEPRj pK j Kj
rj pK j
!εj
1 ER
μj (7.1)
DEPRECIA is, as before, the total depreciation expenditure, DEPRj is the depreciation rate, Kj is the capital stock by sector, rj is the rate of foreign capital rent (foreign rate of return), pK j is the rate of domestic capital rent (domestic rate of return), and εj is the elasticity of sector ratio of foreign capital rent to domestic capital rent. ER is the exchange rate, and μj is the exchange rate elasticity of obsolescence. As the capital stock gets older, the quasi-rent in the Marshallian sense falls. Following the preceding chapter, the economic decision is then taken to scrap the capital object as obsolescent despite its continuing physical durability. 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_7, # Springer-Verlag Berlin Heidelberg 2013
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7 Back to the CGE Mini Model
As a consequence of these changes, the content of the CGE mini model is enhanced by the incorporation of these variables affecting the transformation mechanism. A change has here been done by adding three parameters (rj, εj and μj) and an enlargement of one equation to comprise endogenous obsolescence. As described in Chap. 5, the level of total investment is determined by savings behaviour. In the total savings equation, Eq. 5.33, total depreciation expenditure is included.1
7.2
Re-computations of Numerical Experiments
The first task is to present Table 7.1. That table represents the computed benchmark equilibrium data, i.e., we use the first equilibrium computation as a benchmark dataset. The computed equilibrium is now used as the benchmark dataset because variables, with adherent elasticity coefficients, have been added in the equation representing the total depreciation expenditure (Eq. 7.1). That insertion influences the basic numerical values of the model. In an empirical use of the model, a new calibration must take place if
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