Today, most econometric programs have programming facilities that allow the user to compute estimators not included, and these facilities can be used to implement general equilibrium models on a PC in a convenient manner. The aim here is to demonstrate how easily quite complex models and theorems can be illustrated on a PC, and how simulations of comparative static experiments can be performed to supplement blackboard presentation in class. Production functions for both goods are Cobb-Douglas, so we have constant returns to scale. Factor endowments are given and factors are immobile internationally. It is assumed that consumers maximise utility and producers maximise profits.
All markets are perfectly competitive, and in equilibrium both goods and factor markets are cleared.
If production of a good exceeds local demand by the household, the excess supply is exported, and vice versa for excess demand of a good. The program is reproduced as PROG1.SHA below. Then household income and the demand for both goods that maximise utility are computed, and imports and exports are computed by looking at the differences of production and demand for both goods. Finally, the balance of payments restriction is checked, and results are printed. To illustrate that, consider first an exogenous increase in the endowment of capital from 0.8 to 1.0.