Economic theory

Economic theory#

The software is useful only because each model encodes a coherent system of economic accounts, behavioral equations, identities, market-clearing conditions, and closure rules.

For the Hosoe Standard CGE, the major blocks fit together as follows.

        flowchart LR

    SAM["Benchmark SAM"] --> CAL["Calibration"]

    subgraph PROD["Production"]
        FAC["Primary factors"] --> FIRMS["Firms / activities"]
        INT["Intermediate inputs"] --> FIRMS
        FIRMS --> OUT["Domestic output"]
        FIRMS --> FINC["Factor income"]
    end

    subgraph INST["Institutions and final demand"]
        FINC --> HH["Households"]
        HH --> CONS["Household consumption"]
        HH --> PSAV["Private saving"]
        HH --> DTAX["Direct taxes"]
        DTAX --> GOV["Government"]
        PTAX["Production taxes"] --> GOV
        MTAX["Import tariffs"] --> GOV
        GOV --> GCONS["Government consumption"]
        GOV --> GSAV["Government saving"]
        PSAV --> SAV["Total saving"]
        GSAV --> SAV
        FSAV["Foreign saving"] --> SAV
        SAV --> INV["Investment demand"]
    end

    subgraph TRADE["Trade"]
        OUT --> CET["CET transformation"]
        CET --> EXP["Exports"]
        CET --> DOM["Domestic sales"]
        IMP["Imports"] --> ARM["Armington composite"]
        DOM --> ARM
    end

    ARM --> CONS
    ARM --> GCONS
    ARM --> INV
    ARM --> INT
    EXP --> ROW["Rest of world"]
    ROW --> IMP
    EXP --> BOP["Balance of payments"]
    IMP --> BOP
    FSAV --> BOP
    FAC --> FMKT["Factor-market clearing"]
    FIRMS --> FMKT
    ARM --> CMKT["Commodity-market clearing"]
    CONS --> CMKT
    GCONS --> CMKT
    INV --> CMKT
    INT --> CMKT
    FMKT --> EQ["General equilibrium"]
    CMKT --> EQ
    BOP --> EQ
    CLOS["Closure + numeraire"] -.-> EQ
    CAL -.-> PROD
    CAL -.-> INST
    CAL -.-> TRADE

Use the mouse wheel or a trackpad pinch gesture to zoom, drag to pan, or select ⛶ to inspect the diagram in full screen.

Mermaid source

Download the .mmd source

flowchart LR

    SAM["Benchmark SAM"] --> CAL["Calibration"]

    subgraph PROD["Production"]
        FAC["Primary factors"] --> FIRMS["Firms / activities"]
        INT["Intermediate inputs"] --> FIRMS
        FIRMS --> OUT["Domestic output"]
        FIRMS --> FINC["Factor income"]
    end

    subgraph INST["Institutions and final demand"]
        FINC --> HH["Households"]
        HH --> CONS["Household consumption"]
        HH --> PSAV["Private saving"]
        HH --> DTAX["Direct taxes"]
        DTAX --> GOV["Government"]
        PTAX["Production taxes"] --> GOV
        MTAX["Import tariffs"] --> GOV
        GOV --> GCONS["Government consumption"]
        GOV --> GSAV["Government saving"]
        PSAV --> SAV["Total saving"]
        GSAV --> SAV
        FSAV["Foreign saving"] --> SAV
        SAV --> INV["Investment demand"]
    end

    subgraph TRADE["Trade"]
        OUT --> CET["CET transformation"]
        CET --> EXP["Exports"]
        CET --> DOM["Domestic sales"]
        IMP["Imports"] --> ARM["Armington composite"]
        DOM --> ARM
    end

    ARM --> CONS
    ARM --> GCONS
    ARM --> INV
    ARM --> INT
    EXP --> ROW["Rest of world"]
    ROW --> IMP
    EXP --> BOP["Balance of payments"]
    IMP --> BOP
    FSAV --> BOP
    FAC --> FMKT["Factor-market clearing"]
    FIRMS --> FMKT
    ARM --> CMKT["Commodity-market clearing"]
    CONS --> CMKT
    GCONS --> CMKT
    INV --> CMKT
    INT --> CMKT
    FMKT --> EQ["General equilibrium"]
    CMKT --> EQ
    BOP --> EQ
    CLOS["Closure + numeraire"] -.-> EQ
    CAL -.-> PROD
    CAL -.-> INST
    CAL -.-> TRADE

A useful reading sequence is:

  1. Social Accounting Matrix — what the benchmark accounting table means;

  2. Production and Factor Demand — how sectors transform inputs into output;

  3. Households, Government and Investment — household, government, and investment demand;

  4. International Trade — Armington import substitution and CET export transformation;

  5. Closure, Numeraire and Walras’ Law — what is exogenous, what adjusts, and why one equilibrium condition is redundant.

The diagrams are explanatory views of the equations; the authoritative model definitions and validation evidence remain the implementation and reference tests.