1 A Recursive Dynamic Computable General Equilibrium Model For ...

1.1.2 Private Final Demand
In ORANI-G, final demands stem from four main sources: household consumption,
investment/capital creation, government consumption and exports. This is also the
classification of final demand adopted in input-output tables, the main source of the model
database.
V3PUR(c,s)
p3(c,s)
x3(c,s)
3t t
V3PUR_S(c)
p3_s(c)
x3_s(c)
3t t
Domestic
Good 1
V3TOT
p3tot
x3tot
Good 1
CES
Imported
Good 1
Household
Utility
Klein-
Rubin
up to
7
Domestic
Good C
Good C
CES
Figure 2. Private Demands in ORANI-G
Source: Horridge (2003)
Subsistence
V3SUB(c)
p3_s(c)
x3sub(c)
3t t
Imported
Good C
Luxury
V3LUX(c)
p3_s(c)
x3lux(c)
3t t
Private final demands are characterised by a single representative household. The purchase
of final demands by source (i.e., domestic or imported) is conditional on a CES function
(as in the production nest), whilst ‘composite’ good final demands are determined via
maximisation of a Linear Expenditure System (LES) 8 utility function subject to a budget
constraint (see Figure 2). As noted above, the LES function is preferable to CES or CD
functions since it permits calibration to non unitary income and price elasticities of
demand. This is of particular relevance when characterising (income inelastic) food
demands.
1.1.3 Investment Final Demands
8 Also known as a ‘Klein Rubin’ or ‘Stone Geary’. This function is clearly discussed in Horridge (2003)