Dia 1

1
CGE Models as Research Tools of Regional
Development Analysis
Professor Hannu Törmä 6.2.2009
University of Helsinki, Ruralia
Institute www.helsinki.fi/ruralia/regfin/
2
Computable General Equilibrium Analysis

• CGE team of Ruralia
• CGE modeling
• The RegFin model
• Tax reform for North-Finland
• Development projects of Lapua
• Down-scaling of pulp and paper industry

Many times decisions are based on emotions
only. Scientific calculations that provide
NUMBERS can help the decision makers in making
more rational decisions
3
CGE team of Ruralia
Hannu Törmä, professor management, modelling,
RD Kaarina Reini, PhD research,
marketing Katarzyna Zawalinska, PhD Polish
partner, developer of RegPol
Kaarina
Katarzyna
Hannu
4
Modeling disbute in economic history
Modeling general equilibrium is too complicated
and cannot be done properly. Use the
ceteris paribus condition and isolate the object
of your analysis from the surrounding total
economy. Partial equilibrium analysis is enough!
Marshall is wrong, general equilibrium modeling
should be used in all cases. General equilibrium
is a state of an economy where all markets
clear, supply is equal to demand, so the sum of
excess demands is zero. There is an
equilibrium set of prices and quantities!
5
After 150 years
o There are effective numeric algorithms to
choose from o CGE models have nearly replaced
traditional macro models and complement and
compete with the input-output models o There are
effective and user friendly software available
such as GEMPACK and GAMS/MPSGE o There are a
multitude of numeric simulation models with even
more applications of topics on for example -
taxation - fiscal and monetary policy - foreign
trade - infrastructure investments -
agriculture and forestry - regional economy -
rural development policy - environment -
energy - poverty - etc
6
Structure of the RegFin model
Everything affects everything
7
Tax reform for North-Finland
Could payroll or value-added tax reforms be
efficient means of regional policy as they are in
Norway?
8
The effects of halving payroll taxesof the
employers
Would cost FIM 2441 per capita 13 Northern
most municipalities got small temporary tax
benefits
9
The effects of the value-added tax reform(labour
costs would be exempted from the tax base)
Would cost FIM 2954 per capita no can do
10
Development projects of Lapua
11
Effects on economic growth for Härmänmaa (black
for long-run)
Is 2.3 small or big
Would block 20 million trade flow to
Seinäjoki per year
12
Down-scaling of pulp and paper industry
During 2007-2008 the capasity has decreased by
11.3 Regions (8) Etelä-Karjala Kainuu Keski-Su
omi Kymenlaakso Lappi Pirkanmaa Pohjois-Karjala Po
hjois-Savo
closed
sold
restriction of capasity
13
Decrease of economic growth
GDP
GDP
employment
working years
share of regional GDP
share of regional wage earners
14
www.helsinki.fi/ruralia/regfin/