Chapter 1 Computable general equilibrium modelling for policy analysis and forecasting

This chapter describes computable general equilibrium (CGE) modeling and the history of its development. The chapter illustrates the computation of solutions for CGE models and reviews its achievements, failures, and potential. The model illustrated in the chapter can be used in two ways: as a single-period model suitable for comparativestatic analyses; and as a model for multi-period forecasting. Before CGE models, there were inputoutput models that emphasized inputoutput linkages among industries. CGE models go beyond inputoutput models by linking industries via economy-wide constraints including constraints on the size of government budget deficits; constraints on deficits in the balance of trade; constraints on the availability of labor, capital, and land; and constraints arising from environmental considerations, such as air and water quality. Much of CGE modeling has been concerned with the welfare implications of proposed policy changesfor example, changes in protection, changes in taxes, and changes in environmental regulations. Many interesting welfare results have been obtained, especially in the analysis of tax changes.