A computable general equilibrium framework

Can the Chinese economy accommodate changes in its agricultural sector resulting from trade liberalisation? The answer is complicated by changes in the world agricultural market, especially since the implementation of the Uruguay Round settlement. The agricultural policy debate is entering a difficult stage. While economists disagree, it is often because they do not have a common baseline. Effects are discussed but not quantified, leaving room for poorly defined dispute. This is a problem when recommended policies contain both positive and negative effects – as is the case with agricultural trade liberalisation. Analysis using a quantitative framework is essential to economists’ understanding of the impact of various policy options but also to government decision-making.

Why a computable general equilibrium model?

There are a number of quantitative frameworks available for empirical economic analysis. Partial equilibrium models, such as those utilising flexible profit functions and consumer demand systems, are widely used in economic studies because they are easy to establish, understand and apply. But a comprehensive analysis cannot be made through partial equilibrium models. The scope offered is narrow, with usually only production and/or consumption of one or two commodities being studied. Partial equilibrium models ignore interactions between the sector or commodities and other parts of the economy. They do not capture any feedback effects of policy changes and are unable to consider economy-wide implications.

Macroeconomic models overcome the weaknesses of partial equilibrium models by bringing together the whole economy into a consistent framework. The effect of a change in one part of the economy on other parts is recognised through quantitative relationships between variables specified in the models.