Introduction

The objective of these 11 model exercises is to provide you with step-by-step guidance in building a model, designing experiments, identifying relevant results, and interpreting findings.

The exercises are intended to:

1. • Engage your interest by showing the breadth of real-world problems that can be analyzed using a CGE model.

2. • Illustrate how to use economic theory to make predictions about and to interpret model results.

3. • Demonstrate how the design of model experiments is grounded in economic theory and background research.

4. • Introduce a broad sampling of methodological tools, including how to change elasticities and model closure, decompose shocks into subtotals, develop baseline scenarios, and run sensitivity analyses of assumptions about elasticity parameter values and shock sizes.

The case studies are suitable for use with many types of CGE models. However, the detailed instructions provided in the model exercises are designed for use with the Global Trade Analysis Project (GTAP) CGE model. The model, developed by Thomas Hertel and colleagues at Purdue University, is documented in Hertel and Tsigas (1997). Its user-friendly, menu-driven interface, RunGTAP, was developed by Mark Horridge (2001) and is ideal for use by novice and advanced modelers alike.

Model exercises 1–3 show you how to create a small, three-sector, three-factor database for the United States and an aggregated, rest-of-world region from the GTAP global database (Table ME Introduction 1). The instructions also guide you in setting up, running, and learning about the GTAP CGE model. You should complete these three exercises sequentially before doing the subsequent case studies. You can also use the model developed in these exercises to replicate the model results reported throughout the textbook chapters.

Model Exercises 4–11 provide case studies that complement and reinforce the concepts learned in the related chapters of the textbook. You can do all, or any one, of these exercises, and in any sequence. Model Exercises 9–11 present more challenging techniques for the advanced student. Model Exercises 4–11 are ideal for use as small, collaborative group projects. Each exercise poses questions about model results that can serve as a starting point for your exploration and study of your findings.