The CGE Model Of Chinese Economy And Policy Analysis

The full name of CGE model is computable general equilibrium model, which isa numerical picture of the abstract general equilibrium model and often used todemonstrate how endogenous variables react to the change of exogenous variables.Since the first one built by Johansen in 1960, CGE models have become an effectiveand indispensable instrument for policy analysis. Especially in developing countries,they have been used for a wide range of issues, from medium-to-long-termmacroeconomic policy analysis to traditional microeconomic issues. The author of this paper tries to build a simple CGE model for Chinese openeconomy, and then analyze the impact on Chinese macro economy of a deteriorationof the terms of trade as well as a nominal appreciation of RMB basing on thesolution of the CGE model. The outline of the paper is as follows. The introduction section is a general review of the relevant research on CGEmodels. Chapter 1 illustrates the theoretical basis of CGE models and gives the basicanalytical structure of a CGE model. CGE models derive from Walrasian GeneralEquilibrium model, are often used to conduct numerical simulations of an economy,and then to demonstrate how the whole economy reacts to external shocks in order tokeep the supply-and-demand balance described by Walras. In fact, a CGE modelconsists of a group of equations that describe the general equilibrium in the economy. Basing on the method about running CGE models in EViews given by B.Essama-Nssah(2004), chapter 2 builds a CGE model for Chinese open economy,which includes one country, two sectors of production and three kinds ofgoods(exports, domestic goods and imports). Here all domestically produced goodsthat are not exported are effectively treated as domestic goods. Following the smallcountry assumption, prices for imports and exports are determined in the worldmarket, meanwhile prices for domestic goods are determined by supply and demandconditions within domestic markets. Product differentiation is also specified in theCGE model by the inclusion of two-level CES and CET formulation, which impliesthat domestic goods and import goods are imperfect substitutes, neither domesticgoods and export goods. The numerical implementation of a CGE model entails fitting the analyticalstructure to a data representing the state of the economy for the period underconsideration. Usually, it is believed that the data set represents base yearequilibrium, and so is called benchmark data. The necessary data for an empiricaleconomy-wide model must be organized in a frame that reflects the circular flow ofeconomic activity for the chosen year. The social accounting matrix offers such aframework. It provides an analytical integrated data set, which reflects variousaspects of the economy such as production, consumption, trade, accumulation andincome distribution. Chapter 2 also builds a social accounting matrix basing on theChinese Fund Flow Table in 2001. Chapter 3 demonstrates a numerical implementation of the CGE model, runsimulations to assess the impact of a deterioration of the terms of trade as well as anappreciation of Chinese nominal exchange rate and make sensitivity analysis. In traditional international trade theory, the terms of trade are defined by therelative price of a country's exports and imports. If the same amount of exports canbuy fewer imports compared to the base year, it is a deterioration of terms of trade.According to the index of the terms of trade computed by China Custom, from 1993to 2003, the terms of trade for China has declined by 12%. Chapter 3 implements a 20% increase in the world price of imports. The mainconclusions are as follows. (1) An increase in the world price of imports would directly result in the declineof the amount of imports as well as the quantity of household consumption. (2) Under flexible exchange rate regime, whether there is a real appreciationhinges crucially on the size of the elasticity of import substitution. If the elasticity ismore than one, there would be a real appreciation; If the elasticity...