A simple structure for CGE models

Although computable general equilibrium (CGE) models are now used widely in policy analysis, their growing complexity has become an entry barrier for potential users, and the equation systems are becoming lengthy, hard to understand and difficult to modify or debug. The complexity is partly due to the lack of a clearly defined equation system that is used to solve the model. It is also the consequence of models being designed for multiple uses, with some variables and equations only required for some uses and many unnecessary for most uses. In spite of their apparent complexity, the structure of CGE models is simple, based on standard national accounts data and microeconomic theory. This paper proposes an approach to CGE model building that is based on a ‘basic model’. This basic model is built around a simple and transparent structure that is easily adapted to meet the requirements of different applications. The paper explains how such a simple structure is constructed for a basic CGE model and how the basic model is modified and extended for different applications. In section 2, a few simple models are used to explain the basic structure of equilibrium models and how the model solutions are reached. The insights drawn from these simple models are then applied in section 3 to build a large policy-oriented global CGE model. This example illustrate how the approach is used to produce a simple and transparent equation structure and an initial solution strategy, starting from a standardised data structure. This basic model can be used as a platform to build extensions or modifications required for more sophisticated applications. An example is provided in section 4 to demonstrate that, by adding a few more variables and equations, the basic global model can be quickly modified to include more sophisticated features. The paper concludes with some remarks on the implications of this approach for modelling in general.