SPATIAL EQUILIBRIUM WITH INTERMEDIATE PRODUCTS: IMPLEMENTATION AND VALIDATION IN THE MERCOSUR

This paper develops the formulation of a spatial equilibrium model with intermediate products. The presence of intermediate products brings a better representation of the real world, accounting for the technological relationships among commodities in the several stages of production. Instead of the usual assumption of constant costs of transformation, positively sloped cost of transformation functions are assumed, reflecting increasing marginal costs of transformation. The model is implemented and validated in the analysis of the optimal allocation and pricing of animal products, grains and oilseeds in the MERCOSUR.