The PROVIDE Project Standard Computable General Equilibrium ...

PROVIDE Project Technical Paper 2003: 3 October 2003
the share parameters (δ), the elasticity of substitution parameters (rhoc) and the
shift/efficiency parameters (ac), i.e.,
1
rhoc rhoc −
c c c c c c
rhoc c
− c
− c
( δ
( 1 δ ) )
QQ = ac QM + − QD ∀cm AND cx
(T5)
with the first order conditions defining the optimum ratios of imports to domestic demand in
relation to the relative prices of imported (PM) and domestically supplied (PDD)
commodities, i.e.,
QM
QD
1
⎡
( 1 rhoc
PD δ ⎤ + c )
= ⎢ * ⎥ ∀cm
AND cx . (T6)
⎣PM
( 1−
δ ) ⎦
c c c
c c c
But T5 is only defined for commodities that are both produced domestically (cx) and
imported (cm). Although this condition might be satisfied for the majority of commodities, it
is also necessary to cover those cases where commodities are produced but not imported, and
those cases where commodities are not produced domestically and are imported.
If commodities are produced domestically but not imported, then domestic supply of
domestically produced commodities (QD) is, by definition (T7), equal to domestic commodity
demand (QQ), i.e.,
QQ = QD ∀cmn ΑΝD cx
(T7)
c
c
where the sets cmn (commodities not imported) and cx (commodities produced domestically)
control implementation. On the other hand if commodities are not produced domestically but
are demanded on the domestic market, then commodity supply (QQ) is, by definition (T8),
equal to commodity imports (QM), i.e.,
QQ = QM ∀cm ΑΝD cxn
(T8)
c
c
where the sets cm (commodities imported) and cxn (commodities not produced domestically)
control implementation.
The equations T1 to T8 are sufficient for a general model of trade relationships when
combined with the small country assumption of price taking on all import and export markets.
However, it may be appropriate to relax this assumption in some instances, most typically in
cases where a country is a major supplier of a commodity to the world market, in which case
it may be reasonable to expect that as exports of that commodity increase so the export price
(PE) of that commodity might be expected to decline, i.e., the country faces a downward
sloping export demand curve. The inclusion of export demand equations (T9) accommodates
this feature
© S. McDonald
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