Cge Model

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This paper gives an introduction to Computable General Equilibrium (CGE) modelling, and presents an application of the technique to the analysis of the Europe Agreements between the EU and Hungary, Poland and the former Czechoslovakia. The main purpose of the paper is to illustrate the method, rather than present a state-of-the-art analysis. The CGE-approach makes it possible to pursue the analysis further than possible with analytic methods, and it can yield qualitative as well as quantitative results. A model is presented, and it is used to analyse the consequences of the Europe Agreements as well as the sensitivity of the results to important assumptions. The analysis shows only modest long run gains for the Eastern European countries (around 1-2% of GDP per year), and very small gains for the EU countries. The sensitivity analysis shows that the results are relatively robust to the way the model is calibrated.

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This paper is a shortened and edited version of my Master’s Thesis “Modelling Regional Integration using CGE-models” from the Institute of Economics at the University of Copenhagen (Petersen, 1996). I would like to thank my supervisor Hans Keiding for guidance with the thesis, as well as useful comments on this paper. Furthermore I would like to thank Peter Trier for helpful comments on an earlier version of this paper. However, the usual disclaimer applies. E-mail: twp@dst.dk.

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This paper presents an analysis of the Europe Agreements (EA) between the EU and the Hungary, Poland and the former Czechoslovakia (the so-called Visegrad countries). The main purpose of the paper is to demonstrate KRZ this topic can be analysed using a Computable General Equilibrium (CGE) model, and which issues can be addressed. The discipline of CGE-modelling is relatively new; one can consider it an extension of the Input-Output analysis that Wasilly Leontief made popular in the 1960s. The method applies the structure formalised in the Arrow-Debreu model to analyse actual real-life policy issues. But unlike traditional General Equilibrium models, these models are solved numerically and not analytically – their use is policy driven. This approach has its pros and cons. It means that one can solve very large models and need not worry about finding an analytic solution. The price paid for this is a loss of generality, since the results obtained will be specific to the model and the parameters used - TXLG SUR TXR. This paper is organised as follows. The first section reviews how far one can get with a theoretical approach when modelling regional integration issues. The second section contains short introduction to CGE-modelling. It is not a crash course in CGE-modelling, but a sound knowledge of the methodology makes it easier to appreciate the illustrative model of the Europe Agreements. The third section briefly introduced the Europe Agreements (EAs), and discusses how to model them. Fourth is a presentation of the model that will be used to analyse the issue. The model is relatively simple, but does still have all the features needed to demonstrate how one could go about modelling the issue. The next section contains a brief presentation of the results that the model generates, as well as a discussion of the sensitivity of the results. The final section summarises the findings of the paper, and discusses exactly how CGE-modelling was a useful tool in investigating the Europe Agreements.

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Before attempting to model an issue, it is always worth considering, which parts of reality the model should depict, and which features should be left out. When it comes to modelling the Europe Agreements, or regional integration in general, this amounts to...
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