CHAPTER 5: General Equilibrium1
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2B Tax Incidence : Partial Equilibrium the Most Simple Way of Analyzing
2b Tax Incidence : Partial Equilibrium The most simple way of analyzing tax incidence is to use demand curves and supply curves. This analysis is an example of a partial equilibrium model. Partial equilibrium models look at individual markets in isolation. They are appropriate when the effects of the tax change are | for the most part | confined to one market. They are inappropriate when there are changes in other markets. Why might partial equilibrium analysis be misleading in many cases? Recall that a demand curve for some commodity expresses the quantity consumers wish to buy of a good as a function of the price they pay for that good | holding constant a bunch of stuff. In particular, when drawing an ordinary [as opposed to a compensated] demand curve for socks, we are holding constant the prices buyers pay for all other goods (other than socks), and the incomes of all the buyers. Very often, a tax will change not only the price that consumers pay for socks, but the prices they pay for other goods. For example, an 8 percent sales tax should have some effects on the market for socks. But since a sales tax also applies to many more goods than socks, the sales tax will also probably affect the equilibrium price of shoes, pants, and many other commodities. All these changes will shift the demand curve for socks, if there are any important substitutabilities or complementarities in the demand for socks with the prices of other goods. So partial equilibrium analysis of the market for some commodity, or group of commodities, will be useful, and reasonably accurate, only when looking at at tax which applies only to that group of commodities. -
PARTIAL EQUILIBRIUM Positive Analysis
PARTIAL EQUILIBRIUM Positive Analysis [See Chap 12 ] 1 Equilibrium • How are prices determined? • Partial equilibrium – Look at one market. – In equilibrium, supply equals demand. – Prices in all other markets are fixed. • General Equilibrium – Look at all markets at once. – Consider interactions. 2 Example: Car Market • What happens if the Chinese Govt builds more roads? • Partial equilibrium – Demand for cars rises. – Quantity of cars rises. – Price of cars rises. • General equilibrium – Price of inputs rises. Increases car costs. – Value of car firms rises. Shareholders richer and buy more cars. 3 1 Model • We are interested in market 1. – Price is denoted by p 1, or p. – Firms/Consumers face same price (law of one price). – Firms/Consumers are price takers. 4 Model • There are J agents who demand good 1. – Agent j has income m j – Utility u j(x 1,…,x N) – Prices {p 1,…,p N}, with {p 2,…,p N} exogenous. • There are K firms who supply good 1. – Firm k has technology f k(z 1,…,z M) – Input prices {r 1,…,r M} exogenous. 5 Competitive Market • To understand how the market functions we consider consumers’ and firms’ decisions. • The consumers’ decisions are summarized by the market demand function. • The firms’ decisions are summarized by the market supply function. 6 2 MARKET DEMAND 7 Market Demand • Market demand is the quantity demanded by all consumers as a function of the price of the good. – Hold constant price of the other goods. – Hold constant agents’ incomes. 8 Market Demand • Assume there are two goods, x1 and x2. -
Nonlinearity and Chaos in Economic Models: Implications for Policy Decisions
WORKING PAPER SERIES Nonlinearity and Chaos in Economic Models: Implications for Policy Decisions James B. Bullard Alison Butler Working Paper 1991-002B http://research.stlouisfed.org/wp/1991/91-002.pdf PUBLISHED: Economic Journal, July 1993. FEDERAL RESERVE BANK OF ST. LOUIS Research Division 411 Locust Street St. Louis, MO 63102 ______________________________________________________________________________________ The views expressed are those of the individual authors and do not necessarily reflect official positions of the Federal Reserve Bank of St. Louis, the Federal Reserve System, or the Board of Governors. Federal Reserve Bank of St. Louis Working Papers are preliminary materials circulated to stimulate discussion and critical comment. References in publications to Federal Reserve Bank of St. Louis Working Papers (other than an acknowledgment that the writer has had access to unpublished material) should be cleared with the author or authors. Photo courtesy of The Gateway Arch, St. Louis, MO. www.gatewayarch.com NONLINEARITY AND CHAOS IN ECONOMIC MODELS: IMPLICATIONS FOR POLICY DECISIONS James Bullard Federal Reserve Bank of St. Louis Alison Butler Federal Reserve Bank of St. Louis August 1991 Revised July 1992 Abstract. This survey paper discusses the policy implications that can be expected from the recent research on nonlinearity and chaos in economic models. Expected policy implications are interpreted as a driving force behind the recent proliferation of research in this area. In general, it appears that no new justification for policy intervention is developed in models of endogenous fluctuations, although this conclusion depends in part on the definition of equilibrium. When justified, however, policy tends to be very effective in these models. -
Estimating Impact in Partial Vs. General Equilibrium: a Cautionary Tale from a Natural Experiment in Uganda∗
Estimating Impact in Partial vs. General Equilibrium: A Cautionary Tale from a Natural Experiment in Uganda∗ Jakob Svensson† David Yanagizawa-Drott‡ Preliminary. August 2012 Abstract This paper provides an example where sensible conclusions made in partial equilibrium are offset by general equilibrium effects. We study the impact of an intervention that distributed information on urban market prices of food crops through rural radio stations in Uganda. Using a differences-in-differences approach and a partial equilibrium assumption of unaffected urban market prices, the conclusion is the intervention lead to a substantial increase in average crop revenue for farmers with access to the radio broadcasts, due to higher farm-gate prices and a higher share of output sold to traders. This result is consistent with a simple model of the agricultural market, where a small-scale policy intervention affects the willingness to sell by reducing information frictions between farmers and rural-urban traders. However, as the radio broadcasts were received by millions of farmers, the intervention had an aggregate effect on urban market prices, thereby falsifying the partial equilibrium assumption and conclusion. Instead, and consistent with the model when the policy intervention is large-scale, market prices fell in response to the positive supply response by farmers with access to the broadcasts, while crop revenues for farmers without access decreased as they responded to the lower price level by decreasing market participation. When taking the general equilibrium effect on prices and farmers without access to the broadcasts into account, the conclusion is the intervention had no impact on average crop revenue, but large distributional consequences. -
Introduction
APPLIED GENERAL EQUILIBRIUM MODELS: AN ASSESSMENT OF THEIR USEFULNESS FOR POLICY ANALYSIS Antonio M. Borges CONTENTS Introduction . ..... .. 8 I. History and brief survey . ..... .. 9 II. Strengths and weaknesses of the general equilibrium approach .. 15 A. Strengths . .... .. 15 B. Weaknesses . .... .. 19 111. The "state of the art" - directions of current research .. .. 23 IV. Operational aspects and constraints . .... .. 26 Conclusion: Assessment of general equilibrium models for policy analysis ............................ .. 30 Bibliography ............................ .. 33 Antonio M. Borges is Professor of Economics at INSEAD; he has prepared this paper under contract with the OECD Economics and Statistics Department. 7 INTRODUCTION Applied general equilibrium modelling is nowadays one of the most active areas of research in economics. It has generated much interest among policy makers and policy analysts as a new methodology capable of providing coherent answers to complicated questions in a systematic way. The popularity and prestige of this fairly new approach in applied economics have occasionally led to exagerated optimism about its usefulness to handle any issue or answer any question. Applied general equilibrium models are a powerful and informative tool to deal with important practical policy issues; but they should be developed with great care and used with prudence. A careful and comprehensive model requires substantial resources, which certainly does not make it a fast and ready instrument to handle trivial problems. Its usefulness is unquestionable for certain types of issues, while dubious for others. Based on the Walrasian tradition, applied general equilibrium models describe the allocation of resources in a market economy as the result of the interaction of supply and demand, leading to equilibrium prices. -
Measuring Regulatory Performance
Measuring Regulatory Performance THE ECONOMIC IMPACT OF REGULATORY POLICY: A LITERATURE REVIEW OF QUANTITATIVE EVIDENCE By David Parker and Colin Kirkpatrick Expert Paper No. 3, August 2012 THE ECONOMIC IMPACT OF REGULATORY POLICY: A LITERATURE REVIEW OF QUANTITATIVE EVIDENCE This study provides a critical literature review of the theory and quantitative evidence of the impact of regulatory policy. The theory is addressed through a causal chain analysis which connects regulatory policy through the “better regulation” agenda to economic outcomes. The literature review is intended to provide a reasonably representative sample of studies on regulatory policy and governance in general; administrative simplification and reducing regulatory burdens; ex ante and ex post analyses of regulations; consultation, transparency and accountability; and regulatory institutions. The main policy lessons are highlighted, alongside discussion of the limitations of the literature in terms of content and coverage. © OECD (2012). All rights reserved. 3 FOREWORD OECD countries require better information about where investments in programs to improve regulations should be focused to pay growth and welfare dividends. This is necessary to target scarce resources for reform efforts, and also to communicate progress and generate the political support needed for implementing regulatory policy reforms. The OECD work on Measuring Regulatory Performance is intended to assist countries with the task of identifying this information through the development of measurement frameworks and the collection and interpretation of salient data (www.oecd.org/regreform/measuringperformance). The OECD is developing a framework for Regulatory Policy Evaluation to help countries evaluate the design and implementation of their regulatory policy against the achievement of strategic regulatory objectives (OECD, forthcoming). -
Shocks, Risks and Global Value Chains: Insights from the OECD METRO Model
Shocks, risks and global value chains: insights from the OECD METRO model June 2020 This work is published under the responsibility of the Secretary-General of the OECD. The opinions expressed and arguments employed herein do not necessarily reflect the official views of OECD member countries. 2 │ Shocks, risks and global value chains: insights from the OECD METRO model Shocks, risks and global value chains: insights from the OECD METRO model Executive summary The economic effects of the COVID-19 pandemic have contributed to renewed discussions on the benefits and costs of global value chains (GVCs), and in particular on whether GVCs increase risks and vulnerabilities to shocks. Questions are being raised about whether the gains from deepening and expanding international specialisation in GVCs are worth the associated risks, and whether more localised production would provide greater security against disruptions that can lead to shortages in supply and uncertainty for consumers and businesses. To serve as a starting point for an informed conversation around these questions, this note presents the results of a set of economic model simulations, using the OECD’s trade model, METRO1. We explore two stylised versions of the global economy, one with production fragmentation in GVCs, much as we see today, and another where production is more localised and businesses and consumers rely less on foreign suppliers. Unforeseeable shocks can occur in both economic regimes, both domestically or elsewhere in the world. The question is which version of the global economy offers better performance, in terms of both the level and the stability of economic activity in the face of shocks? The two policy regimes and a set of stylised shocks to simulate systemic risks are used to compare both efficiency and exposure to risk outcomes. -
EUROPEAN UNIVERSITY INSTITUTE, FLORENCE Research DEPARTMENT of ECONOMICS Institute University European Institute
Repository. Research Institute University European Institute. EUROPEAN UNIVERSITY INSTITUTE, FLORENCE Cadmus, on An earlier version o fpaperthis was given at a seminar the at University European Mario Nuti and Felix The Fitzroy. disclaimer usual applies. seminar. Weseminar. would acknowledge particularly the helpful that comments advice constructive the made commentsand at for grateful We ofFlorence,are Institute, Italy. ** University of Edinburgh, European University Institute * University o f Edinburgh University BADIA FIESOLANA, SAN DOMENICO (F I) Access DEPARTMENT OF ECONOMICS European Open RKING PAPER No. ^fESIGHT, NON-LINEARITY § f by H yperinflation * * Donaldand A.R. GEORGE** Author(s). Available The 2020. © in Library * 87/283 87/283 EUI the by produced version Digitised Repository. Research Institute University European Institute. Cadmus, on University Access (C) Leslie T. Oxley Donald and A.R. George. European Open reproduced reproduced in any form without No No part of this paper be may Printed in Italy in April 1987 European UniversityEuropean Institute permission of the authors. - 50016 San Domenico - Domenico (FSan 50016 i) - All rights reserved. Author(s). Available Badia Badia Fiesolana The 2020. © Ita ly in Library EUI the by produced version Digitised 1 Repository. Introduction Research Traditionally, attempts to model hyperinflationary processes have followed one of two routes. Cagan (1956) concentrated on Institute hyperinflation within a fixed output environment. Later writers for example Sargent (1977) Sargent & Wallace (1973) and Flood and University Garber (1980) retained this assumption but extended the basic model by incorporating rational expectations. The second route relates to models which consider inflation European within a growing economy. Here the basic formulation is due to Institute. -
Partial Equilibrium Sequential Search
Labor Economics, 14.661. Lecture 11: Partial Equilibrium Sequential Search Daron Acemoglu MIT December 6, 2011. Daron Acemoglu (MIT) Sequential Search December6,2011. 1/43 Introduction Introduction Introduction Central question for labor and macro: what determines the level of employment and unemployment in the economy? Textbook answer: labor supply, labor demand, and unemployment as “leisure”. Neither realistic nor a useful framework for analysis. Alternative: labor market frictions Related questions raised by the presence of frictions: is the level of employment e¢ cient/optimal? how is the composition and quality of jobs determined, is it e¢ cient? distribution of earnings across workers. Daron Acemoglu (MIT) Sequential Search December6,2011. 2/43 Introduction Introduction Introduction (continued) Applied questions: why was unemployment around 4-5% in the US economy until the 1970s? why did the increase in the 70s and 80s, and then decline again in the late 90s? why did European unemployment increase in the 1970s and remain persistently high? why is the composition of employment so di¤erent across countries? male versus female, young versus old, high versus low wages Daron Acemoglu (MIT) Sequential Search December6,2011. 3/43 Introduction Introduction Introduction (continued) Challenge: how should labor market frictions be modeled? Alternatives: incentive problems, e¢ ciency wages wage rigidities, bargaining, non-market clearing prices search Search and matching: costly process of workers …nding the “right” jobs. Theoretical interest: how do markets function without the Walrasian auctioneer? Empirically important, But how to develop a tractable and rich model? Daron Acemoglu (MIT) Sequential Search December6,2011. 4/43 McCall Model McCall Sequential Search Model McCall Partial Equilibrium Search Model The simplest model of search frictions. -
Equilibrium, Interest and Money: Three Essays in the History of Economic Theory Michael Syron Lawlor Iowa State University
Iowa State University Capstones, Theses and Retrospective Theses and Dissertations Dissertations 1986 Equilibrium, interest and money: three essays in the history of economic theory Michael Syron Lawlor Iowa State University Follow this and additional works at: https://lib.dr.iastate.edu/rtd Part of the Economics Commons Recommended Citation Lawlor, Michael Syron, "Equilibrium, interest and money: three essays in the history of economic theory " (1986). Retrospective Theses and Dissertations. 8263. https://lib.dr.iastate.edu/rtd/8263 This Dissertation is brought to you for free and open access by the Iowa State University Capstones, Theses and Dissertations at Iowa State University Digital Repository. It has been accepted for inclusion in Retrospective Theses and Dissertations by an authorized administrator of Iowa State University Digital Repository. For more information, please contact [email protected]. INFORMATION TO USERS While the most advanced technology has been used to photograph and reproduce this manuscript, the quality of the repr^uction is heavily dependent upon the quality of the material submitted. For example: • Manuscript pages may have indistinct print. In such cases, the best available copy has been filmed. • Manuscripts may not always be complete. In such cases, a note will indicate that it is not possible to obtain missing pages. • Copyrighted material may have been removed from the manuscript. In such cases, a note will indicate the deletion. Oversize materials (e.g., maps, drawings, and charts) are photographed by sectioning the original, beginning at the upper left-hand comer and continuing from left to right in equal sections with small overlaps. Each oversize page is also filmed as one exposure and is available, for an additional charge, as a stondard 35mm slide or as a 17"x 23" black and white photographic print. -
A Model of General Economic Equilibrium Author(S): J
The Review of Economic Studies Ltd. A Model of General Economic Equilibrium Author(s): J. V. Neumann Source: The Review of Economic Studies, Vol. 13, No. 1 (1945 - 1946), pp. 1-9 Published by: Oxford University Press Stable URL: http://www.jstor.org/stable/2296111 . Accessed: 30/06/2011 08:50 Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at . http://www.jstor.org/action/showPublisher?publisherCode=oup. Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission. JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected]. Oxford University Press and The Review of Economic Studies Ltd. are collaborating with JSTOR to digitize, preserve and extend access to The Review of Economic Studies. http://www.jstor.org A Model of General Economic Ecuilibrium1 The subject of this paper is the solution of a typical ec-onomicequation system. -
Can Neoclassical Economics Handle Complexity? the Fallacy of the Oil Spot Dynamic Magda Fontana
Can Neoclassical Economics Handle Complexity? The Fallacy of the Oil Spot Dynamic Magda Fontana To cite this version: Magda Fontana. Can Neoclassical Economics Handle Complexity? The Fallacy of the Oil Spot Dynamic. Journal of Economic Behavior and Organization, Elsevier, 2010, 76 (3), pp.584. 10.1016/j.jebo.2010.08.010. hal-00911826 HAL Id: hal-00911826 https://hal.archives-ouvertes.fr/hal-00911826 Submitted on 30 Nov 2013 HAL is a multi-disciplinary open access L’archive ouverte pluridisciplinaire HAL, est archive for the deposit and dissemination of sci- destinée au dépôt et à la diffusion de documents entific research documents, whether they are pub- scientifiques de niveau recherche, publiés ou non, lished or not. The documents may come from émanant des établissements d’enseignement et de teaching and research institutions in France or recherche français ou étrangers, des laboratoires abroad, or from public or private research centers. publics ou privés. Accepted Manuscript Title: Can Neoclassical Economics Handle Complexity? The Fallacy of the Oil Spot Dynamic Author: Magda Fontana PII: S0167-2681(10)00163-0 DOI: doi:10.1016/j.jebo.2010.08.010 Reference: JEBO 2590 To appear in: Journal of Economic Behavior & Organization Received date: 17-9-2008 Revised date: 25-8-2010 Accepted date: 26-8-2010 Please cite this article as: Fontana, M., Can Neoclassical Economics Handle Complexity? The Fallacy of the Oil Spot Dynamic, Journal of Economic Behavior and Organization (2010), doi:10.1016/j.jebo.2010.08.010 This is a PDF file of an unedited manuscript that has been accepted for publication.