The PROVIDE Project Standard Computable General Equilibrium ...

PROVIDE Project Technical Paper 2003: 3 October 2003
FD
= FD
(C6e)
fact, a fact,
a
must be imposed. But the returns to this factor in different uses (activities) must now be
allowed to vary, i.e., the condition
WFDIST
must now be relaxed.
= WFDIST
(C6f)
fact, a
fact,
a
The number of imposed conditions is equal to the number of relaxed conditions, which
suggests that the model will still be consistent. But the condition fixing the total supply of the
factor is redundant since if factor demands are fixed the total factor supply cannot vary. Hence
the condition
FS
fact
= FS
(C6g)
fact
is redundant and must be relaxed. Hence at least one other condition must be imposed to
restore balance between the numbers of equations and variables. This can be achieved by
fixing one of the sectoral proportions for factor prices for a specific activity, i.e.,
WFDIST
= WFDIST
(C6h)
fact, activ
fact,
activ
which means that the activity specific returns to the factor will be defined relative to the return
to the factor in activ. 15
Start again from the closure conditions for full factor mobility and employments and then
assume that there is unemployment of one or more factors in the economy; typically this
would be one type or another of unskilled labour. If the supply of the unemployed factor is
perfectly elastic, then activities can employ any amount of that factor at a fixed price. This
requires imposing the condition that
WF
fact
= WF
(C6i)
fact
and relaxing the assumption that the total supply of the factor is fixed at the base level, i.e.,
relaxing
FS
fact
= FS
(C6j)
fact
It is useful however to impose some restrictions on the total supply of the factor that is
unemployed. Hence the conditions
Min FS = 0
Max FS
fact
fact
can be imposed. 16
=+ infinity
(C6k)
15 It can be important to ensure a sensible choice of reference activity. In particular this is important if a
factor is not used, or little used, by the chosen activity.
© S. McDonald
48