Computable general equilibrium (CGE) models are sometimes criticized for being “black boxes” in which so many things are moving at once that results are difficult to explain and their credibility as a theoretically consistent, analytical tool is undermined. By deconstructing a standard CGE model with the aid of basic principles of economics, we hope to have dispelled some of their mystery and made them more comprehensible and useful to students and professional economists alike. Such an introductory study seems especially timely given the increased accessibility of CGE models and CGE model databases.

In this book, we studied the main components of a CGE model. We learned that producers in the model are assumed to maximize efficiency, and consumers are assumed to maximize utility. Their microeconomic behavior adds up to the macroeconomic performance of the economy. Our study of each component of the model – supply, demand, factor markets, trade, and taxes – emphasized the model's underlying economic theory and supplied practical examples from small-scale CGE models to illustrate these concepts.

We studied a “standard” CGE model that assumes a representative household consumer, a representative producer of each type of product, and uniquely determined solution values for prices and quantities. It is a static, or single-period, model that provides a before-and-after comparison of an economy after a shock, such as a new tax, but it does not describe the economy's adjustment path from the old to the new equilibrium. All of these features of our CGE model can at times represent shortcomings or constraints. The aggregation of all households, despite the great diversity in their income sources and tastes and preferences, into one representative household consumer is quite a strong assumption. Producers, too, may be diverse in ways that are important to an analysis, perhaps producing the same product using different types of technologies or facing very different transportation costs in different regions of a country. In addition, our world is characterized by some amount of randomness, like weather variability, and this stochasticity is not reflected in our deterministic CGE model. Static models also may not fully address the concerns of policymakers about the transition process, when there can be high unemployment or other types of dislocation as an economy adapts to shocks.