CGE modelling for Iran

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CGE modelling for Iran

• Frank van Tongeren

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Computable General Equilibrium models

• Stylized (but useful) 123 model
• CGE model Iran much more detail (Wednesday)
• GTAP global model, much detail

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CGE

• Economy-wide view
• All activities
• Circular flow of income and expenditures
• Consistency (accounting, theory)
• Ingredients
• Theory, Data, (computer), policy

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Data

• Data for CGE models arranged in Social Accounting
  Matrix (SAM)
• System of National Accounts (SNA)

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A stylized SAM
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Dimensions for Iran SAM, Jensen Tarr, 2003

• Activities
• 43 sectors
• Factors
• Labour, capital, land (specific to agriculture),
  natural resource (specific to oil sector)
• Institutions
• 20 Households, by rural-urban and by income
• 1 government
• Benchmarked to 1999/2000

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Theory

• Neo-classical principles
• Producers maximize profits (or min.cost)
• Consumers maximize utility
• Constant returns to scale in production and
  perfect competition on all markets

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The flow of output in a typical CGE model
Output
Primary factor composite
Composite intermediates
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The flow of output in a typical CGE model
Output
Primary factor composite
Composite intermediates
capital
labour
land
imported
domestic
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The flow of output in a typical CGE model
Exports
Domestic market
Output
Primary factor composite
Composite intermediates
capital
labour
land
imported
domestic
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The flow of output in a typical CGE model
Consumption demand
Exports
Domestic market
Intermediate input demand
Output
Primary factor composite
Composite intermediates
capital
labour
land
imported
domestic
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Production assumptions Cost Minimizing Behavior

• Behavioural equations are derived from an
  economic decision problem
• Choose cost minimizing input mix, given the
  technical characteristics of production
• Cost function C(w, q) min ?wi xi st. q
  f(x)
• ?C(w, q)
• Factor demand ----------- xi(q, w)
  (Shephards lemma)
• ?wi

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Assumptions Separability

• Assume separable, constant returns to scale
  production function
• Separability e.g., of primary factors from
  intermediate inputs means that
• optimal mix of land, labor, and capital is
  invariant to price of intermediates
• elasticity of substitution between any primary
  factor and intermediates is the same (zero in
  this case).
• too restrictive for some purposes (eg.,
  energy-labor substitution is not equal to
  energy-capital substitution).
• can be relaxed if full matrix of substitution
  elasticities is known.

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The flow of output in a typical CGE model
Output
Leontief
Primary factor composite
Composite intermediates
Armington
capital
labour
land
imported
domestic
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The nested production function
Output
Value added
Intermediate inputs
Imported interme- diates
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Final Production - Leontief

• Production function
• share of value-added/intermediates in
  output from the base data.

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Final Production - Leontief

• Production function
• share of value-added/intermediates in output
  from the base data.
• Derived demands

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Value-added Nest CES

• Production function

Primary production factord
Value added
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Value-added Nest CES

• Production function
• Derived demands
• The coefficient SVA is the cost share and PVA the
  price index

Proportional to QVA constant returns to scale
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Value-added Nest CES

• Derivation of price index Cost minimization
  under CES (simplified form)

From the first order conditions
Raise to the power
And sum over all e, to obtain
marginal cost marginal revenue
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Linearizing the CES - Input Demand more
convenient

• Two input case (capital letters levels lower
  case letters change)
• Input demand

Linearized

• Note expansion and substitution effects
• Note no initial levels and shares in linearized
  factor demand eqn. gt convenient for calibration!

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The Iran CGE model (cont.)

• Standard small-open economy (SOE) model
• But
• 20 household groupsd for poverty analysis
• Elaborate oil sector modelling
• Crude oild, 7 refined sectors

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The Iran CGE model (cont.)

• Policies considered
• Tariffication of NTBs
• Tariffication uniform tariff
• Energy price reform
• Exchange rate unification
• Food subsidies

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The Iran CGE model (cont.)

• Main findings
• Tariffication uniform tax increases income of
  poorest 20 income increase rural 11 indcrease
  urban
• This is mainly due to lump-sum transfers from
  govmnt to hhlds
• Lump-sum transfers far better in raising poor
  hhlds income than market intervention through
  commodity taxes/subsidies (leakages, degressivity
  of indirect subs.)
• Removing domestic energy subsidies raises
  exports, but leads to Dutch disease problems
  (depreciation exchnage rate)