The Integrated CGE Model Construction

Abstract

CGE models are simplified representations of entire economies. One approach to constructing a CGE model is through the notion of the circular flow of an economy. Figure 4.1 presents the core of the conceptualized circular flow in a CGE model, adapted from Ghadimi (2007). First, we start with the producers. A CGE model contains multiple producing sectors such as the agricultural sector, the manufacturing sector, the trade sector, the services sector and the utilities sector. The number of sectors (and model complexity) could vary from only two sectors to hundreds sectors, depending on the level of aggregation of industry activity needed for a particular policy analysis. An integrated CGE model often includes a water utility sector that captures, stores, treats and delivers water for its customers. Each industry sector is represented in the model in aggregate over all firms and therefore with a specific production function.