Introduction

GDyn is a recursively dynamic AGE model of the world economy. It extends the standard GTAP model (Hertel 1997) to include international capital mobility, capital accumulation, and an adaptive expectations theory of investment. This chapter discusses the rationale behind the design decisions affecting GDyn and presents its technical features in detail.

The main objective of GDyn is to provide a better treatment of the long-run within the GTAP framework. In standard GTAP, capital can move between industries within a region, but not between regions. This inability of capital to move between regions impedes the analysis of policy shocks and other developments that affect incentives to invest in different regions. For a good long-run treatment, then, we need international capital mobility.

With capital mobile between regions, we need to expand the national accounts to allow for international income payments. Policies that attract capital to a region may have a strong impact on the gross domestic product, but if the investment is funded from abroad, the impact on the gross national product and national income may be much weaker. Therefore, to avoid creating spurious links between investment and welfare, we need to distinguish between asset ownership and asset location: The assets owned by a region need no longer be the assets located in that region, and the income generated by the assets in a region need no longer accrue to that region's residents.