Introduction

Much applied economic modeling focuses on problems concerning selected markets. By definition, a partial equilibrium model includes those markets most immediately relevant to a problem and excludes everything else. If a modeling effort focuses on trade issues, then multiple trading regions may be added. A multi-market, multi-region partial equilibrium model can be small and simple, or large and complex. The model's scope is usually determined by the nature of the analytical problem at hand, the availability of data, the deadline for completion of the analysis, and the cost of construction.

The theory behind partial equilibrium models is the textbook treatment of supply and demand curves. Partial equilibrium models use economic theory to organize data and economic assumptions about markets in a systematic way. The model builder must understand issues concerning data and the measurement of economic parameters as well as the mechanics of computer based model construction. Above all, there must be an understanding of the markets modeled and the economic problem to be analyzed.

This chapter extends concepts developed in Chapter 5, expanding the partial equilibrium framework to multi-market, multi-region partial equilibrium models, like the Static World Policy Simulation framework (SWOPSIM) (Roningen et al., 1991). The “problem oriented” nature of partial equilibrium models is illustrated by their role in the analysis of international agricultural policy reform. A simple partial equilibrium model is expanded, first to two markets, then to two regions.