MPSGE:Closed Economy Models. Solution to Model M1_3S

Closed Economy Models: Solution to Model M1_3S

Josefina Martinez
Department of Economics
University of Colorado

$TITLE  Model M1_3S: Closed 2x2 Economy with Joint Production

$ontext

	Joint production is easily accommodated in the general
	equilibrium framework.  Here we revise the data from model
	M1_1 so that goods X and Y are each produced by sectors A and B.

		  Production Sectors          Consumers
   Markets   |    A       B        W    |       CONS
   ------------------------------------------------------
	PX   |   80      20     -100    |
	PY   |   20      80     -100    |
	PW   |                   200    |       -200
	PL   |  -40     -60             |        100
	PK   |  -60     -40             |        100
   ------------------------------------------------------
$offtext


*       Declare GAMS parameters which we will use in model specification:

SCALAR  TA      Ad-valorem tax rate for sector A inputs /0/;

$ONTEXT

$MODEL: M1_3S

$SECTORS:
	A       ! Activity level for sector A (80:20 for X:Y)
	B       ! Activity level for sector B (20:80 for X:Y)
	W       ! Activity level for sector W (Hicksian welfare index)

$COMMODITIES:
	PX      ! Price index for commodity X
	PY      ! Price index for commodity Y
	PL      ! Price index for primary factor L
	PK      ! Price index for primary factor K
	PW      ! Price index for welfare (expenditure function)

$CONSUMERS:
	CONS    ! Income level for consumer CONS

*       On the first line of the production declaration, the t:'tvalue' 
*       field specifies the transformation elasticity between outputs.  
*       'tvalue' can be zero but not infinity. 

$PROD:A  t:2  s:1
	O:PX    Q:80
	O:PY    Q:20
	I:PL    Q:40.0  A:CONS T:TA
	I:PK    Q:60.0  A:CONS T:TA

$PROD:B t:1.5 s:1
	O:PX    Q:20
	O:PY    Q:80
	I:PL    Q:60
	I:PK    Q:40

$PROD:W s:1
	O:PW    Q:200
	I:PX    Q:100
	I:PY    Q:100
	
$DEMAND:CONS
	D:PW    Q:200
	E:PL    Q:100
	E:PK    Q:100

$OFFTEXT
$SYSINCLUDE mpsgeset M1_3S

*       Fix a numeraire:

	PL.FX = 1;

*       Benchmark replication:

	M1_3S.ITERLIM = 0;

$INCLUDE M1_3S.GEN
	SOLVE M1_3S USING MCP;

	M1_3S.ITERLIM = 2000;
*       Counterfactual: 10% tax on A sector inputs:

	TA = 0.10;

$INCLUDE M1_3S.GEN
	SOLVE M1_3S USING MCP;

*       Counterfactual: 100% tax on A sector inputs:

	TA = 1.00;

$INCLUDE M1_3S.GEN
	SOLVE M1_3S USING MCP;


*----------------------------------------------------------------------------
*       Algebraic representation:

EQUATIONS
	PRF_A   Zero profit for sector X
	PRF_B   Zero profit for sector Y
	PRF_W   Zero profit for sector W (Hicksian welfare index)

	MKT_X   Supply-demand balance for commodity X
	MKT_Y   Supply-demand balance for commodity Y
	MKT_L   Supply-demand balance for primary factor L
	MKT_K   Supply-demand balance for primary factor L
	MKT_W   Supply-demand balance for aggregate demand

	I_CONS  Income definition for CONS;

*       Write the profit constraints as inequalities -- the tax
*       can cause sector A to shut down completely:

PRF_A.. 100 * PL**0.4 * PK**0.6 * (1+TA) =G= 
	100 * (0.8 * PX**(1+2.0) + 0.2 * PY**(1+2.0))**(1/(1+2.0));

PRF_B.. 100 * PL**0.6 * PK**0.4 =G= 
	100 * (0.2 * PX**(1+1.5) + 0.8 * PY**(1+1.5))**(1/(1+1.5));

PRF_W.. 200 * PX**0.5 * PY**0.5 =E= 200 * PW;

MKT_X.. 80 * A * (PX/(0.8*PX**(1+2.0)+0.2*PY**(1+2.0))**(1/(1+2.0)))**2
     +  20 * B * (PX/(0.2*PX**(1+1.5)+0.8*PY**(1+1.5))**(1/(1+1.5)))**1.5
	=E= 100 * W * PX**0.5 * PY**0.5 / PX;

MKT_Y.. 20 * A * (PY/(0.8*PX**(1+2.0)+0.2*PY**(1+2.0))**(1/(1+2.0)))**2.0
     +  80 * B * (PY/(0.2*PX**(1+1.5)+0.8*PY**(1+1.5))**(1/(1+1.5)))**1.5
	=E= 100 * W * PX**0.5 * PY**0.5 / PY;

MKT_W.. 200 * W =E= CONS / PW;

MKT_L.. 100  =E= 40 * A * PL**0.4 * PK**0.6 / PL +
		 60 * B * PL**0.6 * PK**0.4 / PL;

MKT_K.. 100 =E= 60 * A * PL**0.4 * PK**0.6 / PK +
		40 * B * PL**0.6 * PK**0.4 / PK;

I_CONS.. CONS =E= 100*PL + 100*PK + TA*100*A*PL**0.4*PK**0.6;

MODEL ALGEBRAIC /PRF_A.A, PRF_B.B, PRF_W.W, MKT_X.PX, MKT_Y.PY, MKT_L.PL, 
		 MKT_K.PK, MKT_W.PW, I_CONS.CONS /;

*       Check the benchmark:
	
	A.L=1; B.L=1; W.L=1; PX.L=1; PY.L=1; PK.L=1; PW.L=1; CONS.L=200;
	
	TA = 0; 
	ALGEBRAIC.ITERLIM = 0;
	
	SOLVE ALGEBRAIC USING MCP;
	
	ALGEBRAIC.ITERLIM = 2000;
*       Solve the same counterfactuals:

	TA = 0.10;
	SOLVE ALGEBRAIC USING MCP;

	TA = 1.00;
	SOLVE ALGEBRAIC USING MCP;


*--------------------------------------------------------------------------
*       EXERCISE (1): Revise the model structure to represent an
*       infinite elasticity of transformation in sector A.  You will
*       need to rewrite the model with two sectors A1 and A2.  These
*       will have identical cost structure, one producing good X and
*       the other producing good Y.

TA = 0;

$ONTEXT

$MODEL:A1_A2

$SECTORS:
	A1      ! Activity level for sector A producing X               
	A2      ! Activity level for sector A producing Y               
	B       ! Activity level for sector B
	W       ! Activity level for sector W (Hicksian welfare index)

$COMMODITIES:
	PX      ! Price index for commodity A
	PY      ! Price index for commodity B
	PL      ! Price index for commodity L
	PK      ! Price index for commodity K
	PW      ! Price index for Welfare (expenditure function)

$CONSUMERS:
	CONS    ! Income level for consumer CONS

$PROD:A1        s:1
	O:PX    Q:80 
	I:PL    Q:32    A:CONS  T:TA
	I:PK    Q:48    A:CONS  T:TA

$PROD:A2        s:1
	O:PY    Q:20
	I:PL    Q:8     A:CONS  T:TA
	I:PK    Q:12    A:CONS  T:TA

$PROD:B t:1.5  s:1
	O:PY    Q:80 
	O:PX    Q:20
	I:PL    Q:60
	I:PK    Q:40

$PROD:W s:1
	O:PW    Q:200
	I:PX    Q:100
	I:PY    Q:100

$DEMAND:CONS
	D:PW    Q:200
	E:PL    Q:100
	E:PK    Q:100

$OFFTEXT

$SYSINCLUDE mpsgeset A1_A2

*       Benchmark replication
	
	A1_A2.ITERLIM = 0;

$INCLUDE A1_A2.GEN
	SOLVE A1_A2 USING MCP;

	A1_A2.ITERLIM = 2000;
*       Counterfactual: 10% tax on A sectors (A1 and A2) inputs:
	
	TA = 0.10;

$INCLUDE A1_A2.GEN
	SOLVE A1_A2 USING MCP;

*       Counterfactual: 100% tax on A sectors (A1 and A2) inputs:
	
	TA = 1.00;

$INCLUDE A1_A2.GEN
	SOLVE A1_A2 USING MCP;


The solution listing appears as follows:

	       S O L V E      S U M M A R Y
     
     MODEL   M1_3S               

		       LOWER     LEVEL     UPPER    MARGINAL  

---- VAR A               .        1.000     +INF       .         
---- VAR B               .        1.000     +INF       .         
---- VAR W               .        1.000     +INF       .         
---- VAR PX              .        1.000     +INF       .         
---- VAR PY              .        1.000     +INF       .         
---- VAR PL             1.000     1.000     1.000      EPS       
---- VAR PK              .        1.000     +INF       .         
---- VAR PW              .        1.000     +INF       .         
---- VAR CONS            .      200.000     +INF       .         

  A           Activity level for sector A (80:20 for X:Y)
  B           Activity level for sector B (20:80 for X:Y)
  W           Activity level for sector W (Hicksian welfare index)
  PX          Price index for commodity X
  PY          Price index for commodity Y
  PL          Price index for primary factor L
  PK          Price index for primary factor K
  PW          Price index for welfare (expenditure function)
  CONS        Income level for consumer CONS

Counterfactual model: 10% tax on A sector inputs

	       S O L V E      S U M M A R Y
     
     MODEL   M1_3S               

		       LOWER     LEVEL     UPPER    MARGINAL  

---- VAR A               .        0.778     +INF       .         
---- VAR B               .        1.220     +INF       .         
---- VAR W               .        0.995     +INF       .         
---- VAR PX              .        1.064     +INF       .         
---- VAR PY              .        0.936     +INF       .         
---- VAR PL             1.000     1.000     1.000      EPS       
---- VAR PK              .        0.912     +INF       .         
---- VAR PW              .        0.998     +INF       .         
---- VAR CONS            .      198.554     +INF       .         

Counterfactual model: 100% tax on A sector inputs

	       S O L V E      S U M M A R Y
     
     MODEL   M1_3S         

		       LOWER     LEVEL     UPPER    MARGINAL  

---- VAR A               .         .        +INF     41.163      
---- VAR B               .        1.960     +INF       .         
---- VAR W               .        0.896     +INF       .         
---- VAR PX              .        1.227     +INF       .         
---- VAR PY              .        0.705     +INF       .         
---- VAR PL             1.000     1.000     1.000      EPS       
---- VAR PK              .        0.667     +INF       .         
---- VAR PW              .        0.930     +INF       .         
---- VAR CONS            .      166.667     +INF       .         

Algebraic model

	       S O L V E      S U M M A R Y
     
     MODEL   ALGEBRAIC           

		       LOWER     LEVEL     UPPER    MARGINAL  

---- VAR A               .        1.000     +INF       .         
---- VAR B               .        1.000     +INF       .         
---- VAR W               .        1.000     +INF       .         
---- VAR PX              .        1.000     +INF       .         
---- VAR PY              .        1.000     +INF       .         
---- VAR PL             1.000     1.000     1.000      EPS       
---- VAR PK              .        1.000     +INF       .         
---- VAR PW              .        1.000     +INF       .         
---- VAR CONS            .      200.000     +INF       .         

Algebraic model - Counterfactual: 10% tax on sector A inputs

	       S O L V E      S U M M A R Y
     
     MODEL   ALGEBRAIC    

		       LOWER     LEVEL     UPPER    MARGINAL  

---- VAR A               .        0.778     +INF       .         
---- VAR B               .        1.220     +INF       .         
---- VAR W               .        0.995     +INF       .         
---- VAR PX              .        1.064     +INF       .         
---- VAR PY              .        0.936     +INF       .         
---- VAR PL             1.000     1.000     1.000 8.527E-14      
---- VAR PK              .        0.912     +INF       .         
---- VAR PW              .        0.998     +INF       .         
---- VAR CONS            .      198.554     +INF       .         

Algebraic model - Counterfactual: 100% tax on sector A inputs

	       S O L V E      S U M M A R Y
     
     MODEL   ALGEBRAIC 

		       LOWER     LEVEL     UPPER    MARGINAL  

---- VAR A               .         .        +INF     41.163      
---- VAR B               .        1.960     +INF       .         
---- VAR W               .        0.896     +INF       .         
---- VAR PX              .        1.227     +INF       .         
---- VAR PY              .        0.705     +INF       .         
---- VAR PL             1.000     1.000     1.000 4.363E-11      
---- VAR PK              .        0.667     +INF       .         
---- VAR PW              .        0.930     +INF       .         
---- VAR CONS            .      166.667     +INF       .         

EXERCISE. Infinite elasticity of transformation in sector A

	       S O L V E      S U M M A R Y

     MODEL   A1_A2     
		       LOWER     LEVEL     UPPER    MARGINAL  

---- VAR B               .        1.000     +INF       .         
---- VAR W               .        1.000     +INF       .         
---- VAR PX              .        1.000     +INF       .         
---- VAR PY              .        1.000     +INF       .         
---- VAR PL             1.000     1.000     1.000      EPS       
---- VAR PK              .        1.000     +INF       .         
---- VAR PW              .        1.000     +INF       .         
---- VAR CONS            .      200.000     +INF       .         
---- VAR A1              .        1.000     +INF       .         
---- VAR A2              .        1.000     +INF       .         

Counterfactual model: 10% tax on sectors A (A1 and A2) inputs

	       S O L V E      S U M M A R Y
     
     MODEL   A1_A2               

		       LOWER     LEVEL     UPPER    MARGINAL  

---- VAR B               .        1.337     +INF       .         
---- VAR W               .        0.996     +INF       .         
---- VAR PX              .        1.011     +INF       .         
---- VAR PY              .        0.928     +INF       .         
---- VAR PL             1.000     1.000     1.000      EPS       
---- VAR PK              .        0.868     +INF       .         
---- VAR PW              .        0.968     +INF       .         
---- VAR CONS            .      192.890     +INF       .         
---- VAR A1              .        0.823     +INF       .         
---- VAR A2              .         .        +INF      1.662      

Counterfactual model: 100% tax on sectors A (A1 and A2) inputs

	       S O L V E      S U M M A R Y
     
     MODEL   A1_A2               

		       LOWER     LEVEL     UPPER    MARGINAL  

---- VAR B               .        1.960     +INF       .         
---- VAR W               .        0.896     +INF       .         
---- VAR PX              .        1.227     +INF       .         
---- VAR PY              .        0.705     +INF       .         
---- VAR PL             1.000     1.000     1.000      EPS       
---- VAR PK              .        0.667     +INF       .         
---- VAR PW              .        0.930     +INF       .         
---- VAR CONS            .      166.667     +INF       .         
---- VAR A1              .         .        +INF     27.312      
---- VAR A2              .         .        +INF     17.271