A General Equilibrium Model with a Government Sector
The simple model outlined in the previous chapter is now going to be adapted to incorporate a government sector. In the world of model-building, it becomes imperative to simplify the full range of economic activities undertaken by the government if we want to keep the model under development at a tractable level. For this reason we will consider the government taking two basic types of decisions, the first one regarding the level and composition of taxation, the second one dealing with its expenditure and transfers program. Taxes will affect consumers and producers plans by modifying the prices they face – via indirect taxes – and their disposable income – both through indirect and direct taxes. On the other hand, government spending will modify final demand faced by firms either through its direct purchase of goods and services or by the induced changes in consumption demand resulting from transferring income to households. In an economy with fixed resources, however, the activities of the government have an unmistakably re-distributive flavor. Income is extracted from the private sector and then poured back in a different mix. Whether these activities promote welfare, or not, is an issue that numerical general equilibrium can suitably address.
KeywordsGross Domestic Product Commodity Price General Equilibrium Model Final Demand Real Gross Domestic Product
- Brooke, A., Kendrick, D., & Meeraus, A. (1988). GAMS: A user’s guide. San Francisco: Scientific Press.Google Scholar