Functional Forms Used in CGE Models: Modelling Production and Commodity Flows

Various well-known functional forms, such as the Cobb-Douglas function, the Leontief function and the Constant Elasticity of Substitution (CES) function, are used frequently in economic modelling. Traditionally these functional forms have been used to model the production side (isoquants) or consumption side (indifference curves) of microeconomic models. The standard approach in CGE modelling has been to adapt the single-level value-added type production structure to a multi-level production structure, thereby including value-added as well as intermediate inputs. This is typically referred to as 'nested' production structures, and often makes use of combinations of Cobb-Douglas/CES and Leontief functions. In open-economy CGE models CES functions and the related Constant Elasticity of Transformation (CET) functions have been used to model consumers' and producers' decision-making process regarding consumption of production of traded goods (imports or exports) and domestic goods. The various applications of these functional forms are discussed in this paper, with a specific focus on the production side and commodity flows.