Objectives

This book will introduce you to computable general equilibrium (CGE) models. A CGE model is a powerful analytical tool that can help you gain a better understanding of real-world economic issues. CGE models are a class of economic model that over the past three decades has gained widespread use in the economics profession, particularly in government. Economists today are using these models to systematically analyze some of the most important policy challenges and economic “shocks” of the twenty-first century, including global climate change, trade agreements, the spread of human diseases, and international labor migration.

Since the early 1990s, prominent CGE models have been built and maintained at the U.S. International Trade Commission, the Economic Research Service of the U.S. Department of Agriculture, the World Bank, and other national agencies and international organizations to provide ongoing economic analytical capability. These models have come to play an important part in government policy decisions worldwide. For example, the models’ predictions about prices, wages, and incomes factored heavily in the debate about the terms of the North American Free Trade Agreement, the Kyoto Protocol, China's entrance into the World Trade Organization and the Trans-Pacific Partnership. CGE-based analyses have also helped the proposed United States and other governments anticipate and design responses to substantial changes in the availability of key resources, ranging from petroleum to people.

CGE models are comprehensive because – whether they are detailed or very simplified – they describe all parts of an economy simultaneously and how these parts interact with each other. The models describe the efficiency-maximizing behavior of firms and the utility-maximizing behavior of consumers. Their decisions add up to the macroeconomic behavior of an economy, such as changes in gross domestic product (GDP), government tax revenue and spending, aggregate savings and investment, and the balance of trade. As might be expected, such models can require large databases and they contain sophisticated model code. Yet despite their complexity, continuing advances in modeling software and database development are making CGE models increasingly accessible and intuitive. Minimizing the technical entry barriers to CGE modeling has freed economists to focus on the models’ economic behavior and the economic insights that can be derived from their results.