The PROVIDE Project Standard Computable General Equilibrium ...

PROVIDE Project Technical Paper 2003: 3 October 2003
This equation is implemented for all commodities that are produced domestically (cx), with a
control to only include terms for exported commodities when there are exports (ce).
The supply prices of domestically produced commodities are determined by purchaser
prices of those commodities on the domestic and international markets. Adopting the
assumption that domestic activities produce commodities in fixed proportions (actcomactsh),
the proportions provide a mapping (P6) between the supply prices of commodities and the
(weighted) average activity prices (PX). 11
PX = ∑ actcomactsh PXC . (P6)
a a, c
*
c
c
In this model a two-stage production process is adopted, with the top level as a CES
function. The value of activity output can therefore be expressed as the volume share
weighted sums of the expenditures on inputs after allowing for the production taxes, which
are the product of tax rates (tx) and a tax rate-scaling factor (TXADJ), i.e.,
( ( )) ( ) ( )
PX *1 − TXADJ * tx * QX = PV * QVA + PINT * QINT . (P7)
a a a a a a a
But the aggregate price of intermediates (PINT) is not defined. This is defined as the
intermediate input-output coefficient weighted sum of the prices of intermediate inputs, i.e.,
PINT = ∑ comactactco PQD
(P8)
a c, a
*
c
c
where comactactco c,a are the intermediate input-output coefficients.
The price block is completed by two price indices that can be used for price normalisation.
Equation (P8) is for the consumer price index (CPI), which is defined as a weighted sum of
composite commodity prices (PQD) in the current period, where the weights are the shares of
each commodity in total demand (comtotsh)
CPI = ∑ comtotsh * PQD . (P9)
c
c
c
The domestic producer price index (PPI) is defined (P9) by reference to the supply prices for
domestically produced commodities (PD) with weights defined as shares of the value of
domestic output for the domestic market (vddtotsh)
PPI = ∑ vddtotsh * PD . (P10)
c
c
c
11 In the special case of each activity producing only one commodity and each commodity only being
produced by a single activity, which is the case in the reduced form model reported in Dervis et al.,
(1982), then the aggregation weights actcomactsh correspond to an identity matrix.
© S. McDonald
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