|**Tool name:**|**Computable General Equilibrium Models**|
|---|---|
|**What is it?**|CGE models are completely-specified models of an economy or a region, including all production<br>activities, factors, and institutions. The models therefore include the modeling of all markets (in which<br>agent decisions are price responsive and markets reconcile supply and demand decisions) and<br>macroeconomic components, such as investment and savings, balance of payments, and government<br>budget.|
|**What can it be used for?**|CGEs can be used to analyze the poverty and social impacts of a wide range of policies, including<br>exogenous shocks (exchange rate, international prices, etc.), changes in taxation, subsidies, and public<br>expenditure (including changes in trade policies), and changes in the domestic economic and social<br>structure (including technological changes, asset redistribution, and human capital formation).|
|**What does it tell you?**|CGE models are best chosen for policy analysis when the socioeconomic structure, prices, and<br>macroeconomic phenomena all prove important for the analysis. CGEs allow one to take into account<br>all the sectors of the economy, as well as the macroeconomy and, hence, permit the explicit<br>examination of both the direct and the indirect consequences of policies. This is particularly important<br>for those policy reforms that are likely to play a large role in the economy and might have important<br>impacts on other sectors or on the flow of foreign exchange or capital.|
|**Complementary tools:**|Other tools described here belong to this class of models, with an additional model to take distribution<br>into account: the 123PRSP, IMMPA, and the augmented CGE model with a representative household<br>approach. See the respective tables in this annex.|
|**Key elements:**|A CGE can be described by specifying the agents and their behavior, the rules that bring the different<br>markets in equilibrium, and the macroeconomic characteristics. CGEs are based on SAMs (see the<br>table on Social Accounting Matrices) and can be distinguished by the complexity and the level of<br>disaggregation of productive activities, factors, and institutions, including households.|
|**Data/information:**|CGE models are data intensive. They are constructed from combined national accounts and survey<br>data. These are first compiled into a SAM, which is then used as the foundation of the CGE.|
|**Time:**<br>**Requirements**|A few months to a year, depending on the existence of a SAM or of another CGE model built to<br>address a different question. Even these simple CGEs can be complex and time consuming. An<br>alternative is to use a previously constructed CGE. For example, Ianchovichina, Nicita, and Soloaga<br>(2001) use a CGE model constructed by the Global Trade and Analysis Project to examine the impact<br>of the North American Free Trade Agreement on household welfare in Mexico. However, the use of a<br>previously constructed simple CGE can limit the number of policy changes that can be simulated. (In<br>the last example, the model was constructed to examine trade policy and did not cover domestic taxes<br>orpublic expenditure.)|
|**Skills:**|Experienced modelers with substantial prior exposure to CGE models are required.|
|**Supporting**<br>**software:**|Excel, EViews, Gauss.|
|**Financial cost:**|US$25,000–75,000 depending on the existing data.|
|**Limitations:**|The results of CGE simulations depend at least partly on the assumptions made in the model, such as<br>the “closure” rules. These ensure that macroeconomic accounts (fiscal, trade, savings-investment)<br>balance. Whether they are fixed exogenously or allowed to balance endogenously, as well as how they<br>balance, can have a significant impact on the outcomes. In addition, the production accounts specified<br>in most available CGEs are too aggregated to identify the impact of policy changes in one component<br>of one account. Many CGEs have at most two agricultural activities, one each for tradable and<br>nontradable crops, or food crops and cash crops.|
|**References and**<br>**applications:**|�<br>Dervis, de Melo, and Robinson (1982), Decaluwé and others (1999), and Shoven and Whalley<br>(1992) for summaries of the CGE models used.<br>�<br>Ianchovichina, Nicita, and Soloaga (2001). Global Trade and Analysis Project models at<br>www.gtap.agecon.purdue.edu.|

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