Trade and Employment From Myths to Facts - International Labour ...

Chapter 3: Assessing the impact of trade on employment: Methods of analysis
APPPENDIX 3.B
Model specification used for simple CGE simulation
The equations of the model used for the simulations in section 3.4.2 are first the consumption
function (an LES) with Y j as household income for the jth income category
C ij = C ij (Y dj)
where Y dj is disposable income. The material balance is
X i = Σ A ij + C ij + I i + G i + E i
j=1
where government expenditure, G i, and net exports, E i , are taken from the base SAM
and grow at an exogenous rate in the non-agricultural sector. For the agricultural sector,
exports are determined as a residual from this same equation with
X 1 = Q(K 1L 1)
where the production function is Cobb-Douglas. Investment, I i , by destination is given
by
I i / K i = I +α μ u 2 + α r r
where u 2 = X / Q 2 and r is the rate of profit. Household income is given by the value
added in production plus domestic and foreign transfers.
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