Model Extension

Almost all the objectives of this book were accomplished by the end of Chapter 9. That is, we have developed a ‘standard CGE model’ and explained how to compute it with GAMS and interpret the model solutions. The model is equipped with minimum standard features for empirical analysis. By understanding the model structure and computer program, readers are expected to be able to develop and solve their own models. In this chapter, to model a more complicated economy we extend the standard CGE model by replacing some of its basic assumptions. This chapter is aimed mainly at advanced CGE modellers. In Section 10.1, we present a multihousehold model, in contrast to the simple and the standard CGE models, which have only one household. In Section 10.2, we relax the small-country assumption and develop a large-country model to describe the international economy better. In Section 10.3, we extend the one-country model to a two-country model with some suggestions for multicountry models. In Section 10.4, the assumption of perfect competition is replaced by that of monopoly and oligopoly. In Section 10.5, rather than import tariffs, we introduce a quantitative restriction on imports into the standard CGE model. The chapter concludes with Section 10.6, where economies of scale are considered.