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Over the last 20 years, applied general equilibrium (AGE) modelling has developed from a small academic research program into a routinely used policy assessment tool. Major governments and international agencies maintain AGE research groups, and call for their input to a variety of trade, tax, and other resource allocation issues. This book is a collection of papers representative of recent activity in this field. Contributions have been grouped into a methodological section, a trade section, and a section on energy issues, and this division accurately indicates the focus of the volume. Readers will thus have access to up to date techniques and results currently being used by researchers at the forefront of the research program.



ORANI Projections for the Australian Economy for 1989 to 2020 with Special Reference to the Land Freight Industry

ORANI is a detailed general equilibrium model of the Australian economy. In standard applications it generates results for about 100 industries, 6 regions and over 250 occupational groups. The model has been applied by many people in government organizations and universities.
In the present paper ORANI is used to generate forecasts for Australia to the year 2020. Because these forecasts were used as an input to an assessment of the economic viability of upgrading the Sydney/Melbourne rail link, particular attention is given to the prospects for the land freight industry.
Peter B. Dixon, Mark Horridge, David T. Johnson

Public Good Provision Rules and Income Distribution: Some General Equilibrium Calculations

A central issue in the analysis of public goods is the relationship between the optimal provision level and the distribution of income. Theoretical research has stressed the conditions under which the optimum is independent of the distribution of income. Here we focus on numerical analysis of more policy-relevant concerns. Specifically, to what extent is a given redistribution of income likely to affect the optimal level of public good supply? And how significant are the welfare costs of not adjusting public good supply when income distribution changes? We use an applied general equilibrium (AGE) model of the Australian economy and public sector to generate numerical estimates of the impacts of redistributive policies on these variables. Results suggest that the traditional separation of allocation and distribution in determining the level of public good supply may be a justifiable empirical simplification, except where very dramatic redistributions are involved.
John Piggotti, John Whalley

The Pagan-Shannon Approximation: Unconditional Systematic Sensitivity in Minutes

This paper applies a simple approximation procedure to the calculation of systematic sensitivity results for a well-known computable general equilibrium model. The approximation (based on Pagan and Shannon (1985)) is found to be very accurate and requires little computing time.
Randall M. Wigle

A Long Term Model of Oil Markets, Economic Growth and Balance of Payment Constraints

This paper describes LTM, a long term model of oil markets, economic growth and balance of payments constraints. In this paper the model is used to investigate the role of the demand elasticity for oil in determining OPEC’s profit-maximizing production profile. Our experiments reveal that in a model with intertemporal substitution and endogenous capital formation, gross revenue curves are fairy flat. Hence their economic optimum is virtually indeterminate. This suggests considerable leeway in OPEC’s determination of pricing and production policies.
Alan S. Manne, Thomas F. Rutherford

A General Equilibrium Appraisal of Energy Policy in Mexico

This paper develops a static neoclassical general equilibrium model of the Mexican economy that focuses on production, consumption, and exports of energy goods. The specification of the model allows the government to set prices and production levels of energy goods exogenously. Domestic prices differ from international prices, and net exports of these goods are determined residually. The level of energy exports is a major factor in the determination of the government and trade deficits. The analysis presented in this paper serves as a case study of how to design and use an applied general equilibrium model to do policy analysis. An interesting feature is that the model itself is used to determine one of the key parameters, the elasticity of substitution of non-energy imports for domestic goods.
Timothy J. Kehoe, Jaime Serra-Puche

An Empirical Database for a General Equilibrium Model of the European Communities

We document the main features of a database that has been constructed for use in an applied general equilibrium model. The model is designed to evaluate policies of the European Community (EC), including membership. The database includes each of the major members of the EC in the 1970’s: Germany, France, Italy, the Netherlands, Belgium, the United Kingdom, Denmark and Ireland. It also includes three further trading regions: the United States, Japan and a residual Rest of World. Four aspects of our database are documented. The first is the collection and use of “raw data” from a number of sources for 1975. The second aspect is the generation of a multi-year database, with 1975 serving as a “reference year” for temporal updates to more recent years. The third aspect is the application of the database to the calibration of a “generic” general-equilibrium trade model. The final aspect is the use of the database to study the historical accession of the United Kingdom to the EC.
Glenn W. Harrison, Thomas F. Rutherford, Jan Wooton

Three Variants of the Whalley Model of Global Trade

This paper documents the economic structure, functional forms, and aggregation details of three variants of Whalley’s computable general equilibrium model of global trade.
Trien T. Nguyen, Randall M. Wigle

Industrial Organization Implications of QR Trade Regimes: Evidence and Welfare Costs

Evidence of the relationship between trade regimes, concentration and profitability in semi-industrial countries’ manufacturing sectors is reviewed. This evidence is used to justify the formulation and simulation of a three sector general equilibrium model in which the manufacturing sector’s behavior is linked to the degree of restrictiveness of the QR regime. Simulations are conducted with several variants of the model to ascertain separately the effects of introducing economies of scale, firm entry/exit, departures from competitive pricing, and interactions between entry and pricing rules. Numerical results suggest that a 20 percent rationing rate of intermediates and consumption goods can have welfare costs of about 2.0 percent of national income in the absence of economies of scale and industrial organization interactions with the trade regime. When industrial organization features are included, the costs of the same 20 percent rationing quadruples.
Timothy Condon, J. de Melo


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