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  • Print publication year: 2011
  • Online publication date: June 2012

6 - Factors of Production in a CGE Model

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 factor supply and industry structure and between 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 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.

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