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Functional Forms Used in CGE Models: Modelling Production and Commodity Flows

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  • Pauw, Kalie

Abstract

Various well-known functional forms, such as the Cobb-Douglas function, the Leontief function and the Constant Elasticity of Substitution (CES) function, are used frequently in economic modelling. Traditionally these functional forms have been used to model the production side (isoquants) or consumption side (indifference curves) of microeconomic models. The standard approach in CGE modelling has been to adapt the single-level value-added type production structure to a multi-level production structure, thereby including value-added as well as intermediate inputs. This is typically referred to as 'nested' production structures, and often makes use of combinations of Cobb-Douglas/CES and Leontief functions. In open-economy CGE models CES functions and the related Constant Elasticity of Transformation (CET) functions have been used to model consumers' and producers' decision-making process regarding consumption of production of traded goods (imports or exports) and domestic goods. The various applications of these functional forms are discussed in this paper, with a specific focus on the production side and commodity flows.

Suggested Citation

  • Pauw, Kalie, 2003. "Functional Forms Used in CGE Models: Modelling Production and Commodity Flows," Background Paper Series 15606, PROVIDE Project.
    • Handle: RePEc:ags:provbp:15606
    DOI: 10.22004/ag.econ.15606
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    Cited by:

    1. Zhang, Tao & Ma, Ying & Li, Angfei, 2021. "Scenario analysis and assessment of China’s nuclear power policy based on the Paris Agreement: A dynamic CGE model," Energy, Elsevier, vol. 228(C).
    2. Arndt Feuerbacher & Jonas Luckmann, 2023. "Labour‐saving technologies in smallholder agriculture: An economy‐wide model with field operations," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 67(1), pages 56-82, January.
    3. Matthew K. Heun & João Santos & Paul E. Brockway & Randall Pruim & Tiago Domingos & Marco Sakai, 2017. "From Theory to Econometrics to Energy Policy: Cautionary Tales for Policymaking Using Aggregate Production Functions," Energies, MDPI, vol. 10(2), pages 1-44, February.
    4. Paul E. Brockway & Matthew K. Heun & João Santos & John R. Barrett, 2017. "Energy-Extended CES Aggregate Production: Current Aspects of Their Specification and Econometric Estimation," Energies, MDPI, vol. 10(2), pages 1-23, February.
    5. Aramendia, Emmanuel & Brockway, Paul E. & Pizzol, Massimo & Heun, Matthew K., 2021. "Moving from final to useful stage in energy-economy analysis: A critical assessment," Applied Energy, Elsevier, vol. 283(C).

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    Keywords

    Production Economics;

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