The PROVIDE Project Standard Computable General Equilibrium ...

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PROVIDE Project Technical Paper 2003: 3 October 2003 Incomes to the rest of the world account, i.e., expenditures by the domestic economy in the rest of the world, consist of the values of imported commodities and factor services. On the other hand expenditures by the rest of the world account, i.e., incomes to the domestic economy from the rest of the world, consist of the values of exported commodities and NET transfers by institutional accounts. All these transactions are subject to transformation by the exchange rate. In the base model the balance on the capital account is fixed at some target value, denominated in foreign currency terms, e.g., at a level deemed equal and opposite to a sustainable deficit on the current account, and the exchange rate is variable. This assumption can be reversed, where appropriate, in the model closure. Figures 1 and 2 provide further detail on the interrelationships between the prices and quantities. The supply prices of the composite commodities (PQS c ) are defined as the weighted averages of the domestically produced commodities that are consumed domestically (PD c ) and the domestic prices of imported commodities (PM c ), which are defined as the products of the world prices of commodities (PWM c ) and the exchange rate (ER) uplifted by ad valorem import duties (tm c ). These weights are updated in the model through first order conditions for optima. The average prices exclude sales taxes, and hence must be uplifted by (ad valorem) sales taxes (ts c ) to reflect the composite consumer price (PQD c ). The producer prices of commodities (PXC c ) are similarly defined as the weighted averages of the prices received for domestically produced commodities sold on domestic and export (PE c ) markets. These weights are updated in the model through first order conditions for optima. The prices received on the export market are defined as the products of the world price of exports (PWE c ) and the exchange rate (ER) less any exports duties due, which are defined by ad valorem export duty rates (te c ). The average price per unit of output received by an activity (PX a ) is defined as the weighted average of the domestic producer prices, where the weights are constant. After paying indirect/production/output taxes (tx a ), this is divided between payments to aggregate value added (PVA a ), i.e., the amount available to pay primary inputs, and aggregate intermediate inputs (PINT a ). Total payments for intermediate inputs per unit of aggregate intermediate input are defined as the weighted sums of the prices of the inputs (PQD c ). © S. McDonald 12
PROVIDE Project Technical Paper 2003: 3 October 2003 Figure 1 Price Relationships for a Standard Model PQD c ts c PWE c * ER PQS c = 1 te a Ω c σ c PE c = 1 PD c = 1 PM c = 1 PXC c = 1 PWM c * ER tm c PX a1 0 σ ac PX a2 PVA a σ 22 PQD 1 PQD 2 WF k,a PINT a σ 1 WF l2,a WF l1,a Total demands for the composite commodities, QQ c , consist of demands for intermediate inputs, QINTD c , consumption by households, QCD c , enterprises, QENTD c , and government, QGD c , gross fixed capital formation, QINVD c , and stock changes, dstocconst c . Supplies from domestic producers, QDD c , plus imports, QM c , meet these demands; equilibrium conditions ensure that the total supplies and demands for all composite commodities equate. Commodities are delivered to both the domestic and export, QE c , markets subject to equilibrium conditions that require all domestic commodity production, QXC c , to be either domestically consumed or exported. © S. McDonald 13
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