5 - Supply in a CGE Model

Summary

In this chapter, we examine the supply side of an economy as represented in computable general equilibrium (CGE) models. The production data in the social accounting matrix (SAM) depict the production process, in which firms combine intermediate inputs with factors of production to produce goods and services. We use these data to calculate input-output coefficients, which describe the input intensity of production processes. CGE models break down the production technology into parts, depicting how subprocesses are nested within the overall production process. Within each nest, behavioral equations describe producers’ efficiency-maximizing input demands and output levels, subject to their production technology. Export transformation functions, used in some CGE models, describe the allocation of production between domestic and export markets.We also examine the supply and demand structure of a CGE model with a non-diagonal make matrix and a technical appendix examines a case of energy nesting.