The PROVIDE Project Standard Computable General Equilibrium ...

PROVIDE Project Technical Paper 2003: 3 October 2003
Making savings a residual for each account clears the three institutional accounts that are
not cleared elsewhere – enterprises, government and rest of the world. Thus the enterprise
account clears (M7) by defining enterprise savings (CAPENT) as the difference between
enterprise income and other expenditures, i.e., a residual
CAPENT = YE − EENT . (M7)
The government account clears by defining government savings (CAPGOV) as the difference
between government income and other expenditures, i.e., a residual
CAPGOV = YG − EG . (M8)
And the rest of world account clears (M9) by defining the balance on the capital account
(CAPWOR) as the difference between expenditure on imports, of commodities and factor
services, and total income from the rest of the world, which includes export revenues and
payments for factor services, transfers from the rest of the world to the household, enterprise
and government accounts, i.e., it is a residual
⎛
⎞ ⎛
⎞
CAPWOR = ⎜∑
pwmc*
QM
c⎟+⎜∑YFWORf
⎟
⎝ c
⎠ ⎝ f ⎠
⎛
⎞ ⎛
⎞
−⎜∑
pwec*
QEc⎟−⎜∑
factworf
⎟
⎝ c
⎠ ⎝ f ⎠
. (M9)
⎛ ⎞
−⎜∑
howorh
⎟−entwor −govwor
⎝ h ⎠
The final account to be cleared is the capital account. Total savings (TOTSAV), see Y6
above, is defined within the model and hence there has been an implicit presumption in the
description that the total value of investment (INVEST) is driven by the volume of savings.
This is the market clearing condition imposed by (M10)
TOTSAV = INVEST + WALRAS . (M10)
But this market clearing condition includes another term, WALRAS, which is a slack variable
that returns a zero value when the model is fully closed and all markets are cleared, and hence
its inclusion provides a quick check on model specification.
© S. McDonald
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