4 - Final Demand in a CGE Model

Summary

In this chapter, we describe final demand by domestic agents – private households, government, and investors – and by the export market. Data in the Social Accounting Matrix (SAM) describe agents’ incomes and the commodity composition of their spending. The computable general equilibrium (CGE) model depicts demand by domestic agents as a three-stage decision. First, consumers decide on the quantities of each commodity in their consumption basket. Second, an “Armington” import aggregation function describes their choice between domestic and imported varieties of each commodity. In some CGE models, a third stage describes the sourcing of imports. We survey functional forms commonly used in CGE models to describe private household preferences. We also introduce the concept of “national welfare,” which is the monetary value of changes in a nation’s well-being following an economic shock.