Comparing Demand and Supply Multipliers in two Regional Economies: A Multisectorial Computable General Equilibrium Approach

We compute demand and supply multipliers in order to compare them. These multipliers are computed by using a CGE model. The analysis is applied to two regional economies, Catalonia and Extremadura, so we can compare the results of both economies. We build a Computable General Equilibrium (CGE) model of Catalonia and Extremadura, and we ask first the following question for each economy. Suppose that the foreign sector increases its demand by one monetary unit of some particular good produced by some specific sector. We want to know what is the impact of this event on the main economic variables (relative prices, quantities, consumers’ income and welfare, etc). By doing this exercise for each production sector we may learn which one has a greater impact on the economy, and this may allow us to classify sectors according to some criteria. This is just a way of computing, in a general equilibrium setup, the classical (demand) multipliers for one economy. Although the concept of multiplier has been very used in the literature, it has been mainly applied in an input-output setup. Recently, Cardenete and Sancho (2010) have compared the multipliers arising in an input-output setup with those computed by a general equilibrium model. They show that the later are lower than the former in value and actually some of these multipliers are negative. We also define and use our model to compute what we may call supply multipliers for our economies. We simulate for each sector an increase in the efficiency in their production process. This may come from productivity gains in their production technology. We consider each sector having productivity gains (one by one) and we look at their impact on the main economic variables. The results of these simulations can be used to classify sectors according to the same criteria used previously in the classical demand context. We use a methodology in order to compare demand and supply multipliers to conclude if they give different information about the importance of the impact of the demand or supply exogenous variables considered. This information can be useful to address policies in the appropiate directions. Finally we compare the behaviour and structure of the two regional economies by comparing their corresponding multipliers. Several supply multipliers have been computed, showing very different values for both economies. Regarding demand multipliers, we also expect relevant differences between Catalonia and Extremadura.