Trade Coefficients and the Role of Elasticity in a Spatial CGE Model Based on the Armington Assumption
The Armington Assumption in the context of multi-regional CGE models is commonlyinterpreted as follows: Same commodities with different origins are imperfect substitutes for eachother. In this paper, a static spatial CGE model that is compatible with this assumption andexplicitly considers the transport sector and regional price differentials is formulated. Tradecoefficients, which are derived endogenously from the optimization behaviors of firms andhouseholds, are shown to take the form of a potential function. To investigate how the elasticityof substitutions affects equilibrium solutions, a simpler version of the model that incorporatesthree regions and two sectors (besides the transport sector) is introduced. Results indicate: (1) ifcommodities produced in different regions are perfect substitutes, regional economies will beeither autarkic or completely symmetric and (2) if they are imperfect substitutes, the impact ofelasticity on the price equilibrium system as well as trade coefficients will be nonlinear andsometimes very sensitive.
|Date of creation:||01 Jan 2009|
|Publication status:||Published in IDE Discussion Paper = IDE Discussion Paper, No. 204. 2009-01-01|
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