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2017 | OriginalPaper | Chapter

4. Computable General Equilibrium Modeling and Its Application

Authors : Adam Rose, Fynnwin Prager, Zhenhua Chen, Samrat Chatterjee, Dan Wei, Nathaniel Heatwole, Eric Warren

Published in: Economic Consequence Analysis of Disasters

Publisher: Springer Singapore

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This chapter details Step 4 of the research framework: CGE modeling. CGE model simulations are run for each of the multiple random draws for each different hazard scenario. Relevant Direct Impact values are input into the USCGE model of the US economy, which captures the combined and interactive effects of these impacts through price changes and substitution effects across multiple economic institutions – 58 sectors, 9 household groups, government institutions, and international traders. GDP and employment impacts are generated for each of these multiple scenarios, and where relevant the Economic Structure of the impacted region is also factored in by scaling the national average results across three different example regional economy structures to render four times the number of original unique GDP and employment combination results.

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This represents the transactions between economic sectors, households, government, and foreign entities.

In a subsequent study, we further expanded the analysis of the avoidance behavior to account for the workforce participation reduction due to people staying home from work and for caregivers taking care of children who avoid school attendance (Prager et al. 2016).

The labor wage rate increases at a rate similar to the reduction in labor factor supply. This is to be expected as the labor wage rate is allowed to vary and the two elements (labor factor supply and labor wage rate) are on the opposite sides of the same equation. This implies that the elasticity of labor supply is around 1.A recent Congressional Budget Office (CBO) review of empirical studies found that elasticity of labor supply “ranges from 0.27 to 0.53, with a central estimate of 0.40” (Reichling and Whalen 2012).This result conflicts with intuition about the short-run theory of labor wages, which suggests that wages will be “sticky” due to contracts and worker wage preferences. On the other hand, the wage changes are small (less than 1 percent), so this is not unrealistic.

If we assume a slightly higher per person medical expenditure in the Severe Outbreak scenario, it will lead to slightly higher positive impacts to the economy stemming from the higher total medical expenditure. If at the same time we assume the per person lost productivity for the Severe Outbreak scenario is also slightly higher than the Mild Outbreak scenario as discussed in the sensitivity case above, the macro effect of the two will offset each other to some extent, since increased medical expenditure results in overall positive impact to the economy while reduction in workforce participation results in negative impact to the economy.

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Title: Computable General Equilibrium Modeling and Its Application
Authors: Adam Rose
Fynnwin Prager
Zhenhua Chen
Samrat Chatterjee
Dan Wei
Nathaniel Heatwole
Eric Warren
Publisher: Springer Singapore
Book: Economic Consequence Analysis of Disasters
Print ISBN: 978-981-10-2566-2

Electronic ISBN: 978-981-10-2567-9

Copyright Year: 2017
DOI: https://doi.org/10.1007/978-981-10-2567-9_4

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