LECTURE 4:
FROM SAM TO CGE:
STRUCTURE, CALIBRATION, AND
CLOSURE RULES
Table 1: A Basic Social Accounting Matrix (SAM)
(1)
(2)
Activities
Household
consumption
(4)
Labour and
mixed
income
(5)
Operating
surplus
Corporate
enterprises
Net taxes on
products
(7)
Combined capital
accounts
(8)
(6)
(7)
Government
consumption
Fixed capital
formation
and change
in stocks
Exports
Demand for
products
Interhousehold
transfers
Distributed
profits to
households
Direct taxes
Direct taxes
Household
savings
Enterprise
savings
Factor
income
receipts
Current
transfers to
households
Net current
transfers
from RoW
Current
household
receipts
Current
transfers to
enterprises
Net current
transfers
from RoW
Current
enterprise
receipts
Net current
transfers
from RoW
Current
government
receipts
Net capital
transfers
from RoW
Capital
receipts
Government
savings
Imports
Supply of
products
TOTALS
Net factor
income from
RoW
Capital
transfers
Current
external
balance
Rest of World (RoW)
(combined account)
TOTALS
(8)
Sales of
commodities
Households
(6)
(5)
Gross value
added
payments to
factors
(3)
Government
(&NPISHs)1
(4)
Domestic
sales
Factors of production
Institutions
(Current accounts)
(3)
Intermediate
consumption
(1)
Products
Production
(2)
Costs of
production
activities
Factor
income
payments
Current
household
outlays
Current
enterprise
outlays
Current
government
outlays
Capital
outlays
Aggregate
receipts from
RoW
Aggregate
outlays to
RoW
FROM SAM TO CGE
• Exogenous vs endogenous activities
• Modelling endogenous behaviour, by determining
functional form and parameter values that
appropriately describe economic activity, e.g.
production functions, factor supply equations,
consumption (demand) equations
• Incorporate prices formally
• Identity equations
CONSUMER DEMAND
• Nested demand function
i) Demand for commodities (utility function)
ii) Source of commodities (domestically produced goods vs.
imports)
• Corresponds to distinction between commodities and
activities in the SAM
• Uses Armington aggregation function to determine balance of
domestic and imported goods in the consumption bundle
• May also add a third layer
iii) Choice of imports across countries in response to relative
prices (eg Italian vs Chinese footwear)
Two-stage consumer demand
ARMINGTON ELASTICITIES
PRODUCTION ACTIVITIES
• Nested production function
i) Intermediate inputs (Leontief, CobbDouglas)
ii) Value-added function (CES, Cobb-Douglas)
iii) Final production function (CES, CobbDouglas)
NESTED PRODUCTION FUNCTION
EXPORT SUPPLY
• How do domestic producers in a small country
respond to a relative change in world price of
exportables?
• Export transformation elasticities (CET model)
FACTOR SUPPLIES
• Factor mobility:
i) Fully mobile factors
ii) Immobile factors
iii) Factor mobility elasticity (-1< σf < 0)
Capital
Labour
MICRO CLOSURE
• Market clearing assumptions:
i) Excess supply (fixed price model)
ii) Full employment (flex price model)
PRICE EQUATIONS
• Exogenous world prices for imports (small country assumption)
• Mix of endogenous and exogenous prices for exports (small country
assumption relaxed for key export sectors, eg cocoa in Ghana)
• Domestic price of imports are world prices plus transportation margins,
distribution mark-ups, tariffs (net of subsidies)
• Prices of domestically produced goods are determined by production costs
plus transportation margins, distribution costs and indirect taxes (net of
subsidies)
• Normalize prices in base-year, such that all changes are relative to baseyear values
• Money is neutral
NUMERAIRE
• CGE models operate in relative price space
(Walras’ Law)
• Choice of numeraire:
wage level (Johansen, 1960)
consumer price index
producer price index
GDP deflator (IFPRI models)
global factor price index (GTAP)
CALIBRATION
• Selection of parameters to replicate the initial
equilibrium (base SAM)
• Solve for parameters in reverse, e.g.
i) Estimate elasticities econometrically, or
ii) Select elasticities from data bank
• Sensitivity analysis
MACRO CLOSURE
(Sen, 1963)
• Closed Economy model:
• S≡I
• Savings driven (‘neo-classical’)
• Investment driven (‘structural’)
MACRO CLOSURE
• Open Economy model:
• S–I≡X+R–M–O
• Open Economy with Government:
• S–I≡X+R–M– O+G–T
SOLUTION STRATEGIES
• Most CGE model are exercises in comparative statics i.e.
• Shock the system by manipulating
i) External parameters (e.g. rate of foreign lending; terms of trade)
ii) Policy parameters (e.g. tariff rate; government expenditure)
iii) Structural parameters (e.g. sector-specific technological change)
• Compare new results with originals
• Test sensitivity of results to
i) different elasticities
ii) different macro closure rules
iii) different political reaction functions
• Some experiments with dynamic CGE models (e.g. allowing capital
equipment effects and including vintage effects in production
activities) as well as path analysis of outcomes
MACRO CLOSURE MATTERS
• CGE analysis of trade liberalization for Costa Rica,
1991 (Cattaneo et al., 1999)
• Savings-driven (neoclassical) model, but tests
i) external closure rule: fixed foreign savings vs
flexible foreign savings
ii) public sector closure rule: flexible government
revenue vs fixed government revenue (via increase in
corporate taxes or in sales taxes)
RESULTS
Flexible
Flexible Flexible
government corporate
sales
savings
taxes
taxes
(% change)
Flexible
Flexible Flexible
government corporate
sales
savings
taxes
taxes
(% change)
A. Fixed foreign savings
C
I
G
X
M
GDP
9.15
-22.96
0.00
5.59
5.51
2.89
-9.01
0.00
7.06
6.96
1.29
-2.06
0.00
7.47
7.39
1.12
1.05
1.02
agric
food
manuf
const
serv
GDP
2.49
3.68
4.46
-26.69
-0.53
3.01
0.70
4.96
-6.65
-1.46
4.01
-4.20
4.61
-1.61
-1.37
1.12
1.05
1.02
-0.36
5.55
-1.23
0.93
6.40
1.85
5.30
-1.82
-0.60
8.69
4.10
4.65
-1.47
-5.38
2.34
1.30
0.83
0.41
B. Flexible foreign savings
C
I
G
X
M
GDP
1.30
-2.20
0.00
1.32
15.08
0.83
-2.01
0.00
5.35
11.05
0.41
-2.69
0.00
7.49
7.91
1.30
0.83
0.41
agric
food
manuf
const
serv