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Computable general equilibrium modeling

Economic modelling makes it possible to provide, ex-ante, a quantitative estimation of an economic policy reform (or a specific exogenous shock) on an economic sector, an economy, a region of the world, or the world economy. Economic modeling can help structure the debate around political reform, in particular by identifying the channels through which the effects of a political decision is transmitted to the well-being of economic agents, and the importance of these channels.

Economic modeling is based upon the following components: (i) economic theory as far as the relations between economic variables are concerned; (ii) economic data to calibrate the model based upon real-life information; (iii) an econometric estimation of the importance of the relation between economic variables (behavioral parameters).

The two main pillars of economic modeling are partial equilibrium models and general equilibrium models.

In partial equilibrium models, the functioning and equilibrium of some markets (in particular factor markets) are not taken into account. The advantage is to simplify the component of the model that is of less interest to the modeler. This can help to more accurately analyze an economic mechanism or a policy in the sector(s) that are priorities for the modeler. This also allows more transparent results of the model.  This simplifying hypothesis comes at a cost which is the failure to take into account what is happening for markets of productive factors (labour, capital, land).

In general equilibrium models, the equilibrium on all markets is considered. For illustration, when a policy reform of the wheat market is studied, its impact on the labor and land markets is taken into account, but also the impact on public revenues, households, and upstream and downstream sectors.  The feedback impact of all these changes on the wheat market is also considered. While this means that general equilibrium models are consistent, they are more complex than partial equilibrium models. The transparency they offer comes at the cost of analyzing many economic variables and relations.

The objective of this course is to enable people to understand how partial equilibrium models and general equilibrium models are designed and programmed. The target audience of this online course on economic modeling will be people interested in economic modeling through their jobs in research centers, ministries, international institutions, and non-governmental organizations, for research projects that rely upon estimation of the economic effects of policy reform. All participants should have knowledge of economic theory and the use of macroeconomic data. They should also be familiar to the programming under GAMS.  If unfamiliar with GAMS, there is a set of helpful tutorial videos courtesy of AGRODEP linked here.