Book contents
- Frontmatter
- Dedication
- Contents
- List of Text Boxes
- Acknowledgments
- About This Book
- 1 Introduction to Computable General Equilibrium Models
- 2 Elements of a Computable General Equilibrium Model
- 3 The CGE Model Database
- 4 Final Demand in a CGE Model
- 5 Supply in a CGE Model
- 6 Factors of Production in a CGE Model
- 7 Trade in a CGE Model
- 8 Taxes in a CGE Model
- 9 Regulations in a CGE Model
- 10 Conclusion: Frontiers in CGE Modeling
- Model Exercises
- Appendix A Social Accounting Matrix for the United States, 2007 $U.S. Billions
- Appendix B Price and Quantity Variables and Definitions in a Standard CGE Model
- Glossary
- Practice and Review Answer Key 385
- Model Exercise Answer Key 391
- References
- Author Index
- Subject Index
6 - Factors of Production in a CGE Model
Published online by Cambridge University Press: 02 February 2017
- Frontmatter
- Dedication
- Contents
- List of Text Boxes
- Acknowledgments
- About This Book
- 1 Introduction to Computable General Equilibrium Models
- 2 Elements of a Computable General Equilibrium Model
- 3 The CGE Model Database
- 4 Final Demand in a CGE Model
- 5 Supply in a CGE Model
- 6 Factors of Production in a CGE Model
- 7 Trade in a CGE Model
- 8 Taxes in a CGE Model
- 9 Regulations in a CGE Model
- 10 Conclusion: Frontiers in CGE Modeling
- Model Exercises
- Appendix A Social Accounting Matrix for the United States, 2007 $U.S. Billions
- Appendix B Price and Quantity Variables and Definitions in a Standard CGE Model
- Glossary
- Practice and Review Answer Key 385
- Model Exercise Answer Key 391
- References
- Author Index
- Subject Index
Summary
In this chapter, we explore factor markets in a computable general equilibrium (CGE) model. Data in the Social Accounting Matrix (SAM) on factors of production describe factors’ sources of employment and income. Important factor market concepts in the CGE model are factor mobility assumptions, the effects of factor endowment and productivity growth, complementary and substitute factors, full-employment versus unemployment model closures, and the links between changes in factor supply and industry structure and between changes in industry structure and factor prices.
Factors of production are the labor, capital, land, and other primary resources that producers combine with intermediate inputs to make goods and services. A nation's factor endowment is its fundamental stock of wealth because factors represent its supply of productive resources. In Chapter 5, we considered production activities’ demand for factors and how these adjust with changes in relative factor prices or output levels. Many other dimensions of factor markets in a CGE model also deserve study.
In the next sections, we describe factor markets in standard CGE models in detail, focusing on those aspects that are of greatest practical importance for CGE modelers. We begin by studying the factor market data in the SAM. Then we consider the behavior of factor markets in the CGE model. We explain factor mobility assumptions, which govern the readiness of factors to change their employment in response to changing wages and rents across industries. We explore the effects of changes in the supply, or endowment, of factors and contrast it with changes in the “effective” endowment when factor productivity changes. We study the implications of assuming production functions, or industry technologies, that treat factors as complements (low factor substitutability) versus substitutes (high factor substitutability). We describe the CGE model's closures rules that specify full employment versus factor unemployment and demonstrate the importance of this assumption for model results. Finally, we examine the links between factor markets and the industry structure of an economy. We study how a change in factor endowments leads to changes in the industry structure, and we examine how changes in industry structure leads to changes in factor prices and factor input ratios across industries.
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- Information
- Introduction to Computable General Equilibrium Models , pp. 149 - 167Publisher: Cambridge University PressPrint publication year: 2017