Computable general equilibrium（CGE）CoPSmodelling and global supply chain（GSC）analysis

Computable general equilibrium(CGE) CoP modelling and global supply chain(GSC) analysis presentation by Peter b. dixon at the global value-Chain Training and Research workshop UIBE, Beijing August 2. 2017

1 Computable general equilibrium (CGE) CoPS modelling and global supply chain (GSC) analysis presentation by Peter B. Dixon at the Global Value-Chain Training and Research Workshop UIBE , Beijing August 2, 2017

Topics CoP 1. Input-output economics, the foundation of CGe GSC (a) the input-output table (b) national accounts (c) the one-country input-output model d) the leontief paradox (e) effective rates of protection (e) the multi-regional or multi-nationalI-O model starting point for CsC analysis 2. CGE modelling (a)Johansens model of norway (b) Johansens solution matrix versus Leontief's inverse (c trade in a cge model, armington to melitz 2

2 CoPS Topics 1. Input-output economics, the foundation of CGE & GSC (a) the input-output table (b) national accounts (c) the one-country input-output model (d) the Leontief paradox (e) effective rates of protection (e) the multi-regional or multi-national I-O model - starting point for CSC analysis 2. CGE modelling (a) Johansen’s model of Norway (b) Johansen’s solution matrix versus Leontief’s inverse (c) trade in a CGE model, Armington to Melitz

Topics CoP 3. Applying existing Cge models to supply chain issues (a) Walmsley minor on reversing NAFTA (b)Dixon, Rimmer and waschik on Buy-America(n) 4. Towards a Cge model with supply chain features: designs, components, assembly and sales 5. Concluding remarks 3

3 CoPS Topics 3. Applying existing CGE models to supply chain issues (a) Walmsley & Minor on reversing NAFTA (b) Dixon, Rimmer and Waschik on Buy-America(n) 4. Towards a CGE model with supply chain features: designs, components, assembly and sales 5. Concluding remarks

1. Input-output economics Col Wassily leontief 905-1999 Nobel prize for economics

4 CoPS 1. Input-output economics WassilyLeontief 1905-1999 Nobel prize for economics in 1973

Input-output database for USAGE, a Col detailed cge model of the us Absorption Matrix Prod Invest- House- ExportsGovt ucers holds Size ←|→|←1 1→←1→ Basic Flows CXS BASI BAS2 BAS3 BAS4BAS5 Margins CxSxN MARI MAR2 MAR3 MAR4 MAR5 Sale Taxes CXS TAXI TAX2 TAX3 TAX4 TAX ↓ Labour M LABOCCIND C=Number of commodities /= Number of industries S=2; domestic and imported Capital CAPITAL M= Number of occupations N= Number of commodities used as margins Joint production Duty Size ←I→ ←1→ MAKE TARIFF 5

5 CoPS Input-output database for USAGE, a detailed CGE model of the US Absorption Matrix 1 2 3 4 5 Prod￾ucers Invest￾ors House￾holds Exports Govt Size  I →  I →  1 →  1 →  1 → Basic Flows  CS  BAS1 BAS2 BAS3 BAS4 BAS5 Margins  CSN  MAR1 MAR2 MAR3 MAR4 MAR5 Sales Taxes  CS  TAX1 TAX2 TAX3 TAX4 TAX5 Labour  M  LAB0CCIND Capital  1  CAPITAL C = Number of commodities I = Number of industries S = 2; domestic and imported M = Number of occupations N = Number of commodities used as margins Joint Production Matrix Import Duty Size  I → Size  1 →  C  MAKE  C  TARIFF

National accounts: value of inputs Col equals value of output Sum(BAS1)+ Sum(MARI)+ Sum(TAx1)+ Sum(laboCCIND)+ Sum( CaPItaL Sum(BasI)+Sum (BAS2)+Sum(BAS3)+Sum(BAS4)+Sum(BASS) Sum MARI+Sum (Mar2)+Sum MAR3)+Sum(MAr4)+Sum(MAR5) Sum( BASI(imp))+ Sum (BAS2(imp)) Sum (bas3(imp))+ Sum(basS(imp))l Simplifying Sum(BASI)+SumMMARI)+Sum(TAX1)+ Sum(LABOCCIND)+ Sum (CAPItAl) Sum(BAS1)+Sum(BAS2)+Sum(BAS3)+Sum (BAS4)+ Sum (BASS) SumMMARI)+Sum(MAR2)+Sum(MAR3)+Sum(MAR4)+Sum(MAR5 Sum( BaSI(imp))+ Sum(Base(imp)) Sum(baS3(imp))+ Sum(BasS(imp)

6 National accounts: value of inputs CoPS equals value of output Sum(BAS1) + Sum(MAR1) + Sum(TAX1) + Sum(LABOCCIND) + Sum(CAPITAL) = Sum(BAS1)+Sum(BAS2)+Sum(BAS3)+Sum(BAS4)+Sum(BAS5) + Sum(MAR1)+Sum(MAR2)+Sum(MAR3)+Sum(MAR4)+Sum(MAR5) - [Sum( BAS1(imp)) + Sum(BAS2(imp)) + Sum(BAS3(imp)) + Sum(BAS5(imp))] Sum(BAS1) + Sum(MAR1) + Sum(TAX1) + Sum(LABOCCIND) + Sum(CAPITAL) = Sum(BAS1)+Sum(BAS2)+Sum(BAS3)+Sum(BAS4)+Sum(BAS5) + Sum(MAR1)+Sum(MAR2)+Sum(MAR3)+Sum(MAR4)+Sum(MAR5) - [Sum( BAS1(imp)) + Sum(BAS2(imp)) + Sum(BAS3(imp)) + Sum(BAS5(imp))] Simplifying:

Income and expenditure measures of GDP CoPS Sum(LABOCCIND)+ Sum(CAPITAL)+ Sum TAXl) Sum(tarIFF)+ ∑ Sum(TAXo Sum(BaS2)+ Sum (MAR2)+ Sum(TAX2) Sum(baS3)+ Sum MAR3)+ Sum(TAX3) Sum(baS4)+ Sum (MAR4)+ Sum(TAX4) Sum(Bass)+ Sum(MAr5)+ Sum(TAX5) [2 Sum(BASO(imp))-Sum(TARIFF)I 7

7 CoPS Income and expenditure measures of GDP Sum(LABOCCIND) + Sum(CAPITAL) + Sum(TAX1) + Sum(TARIFF)+ 5 =2  Sum(TAX) = Sum(BAS2) + Sum(MAR2) + Sum (TAX2) + Sum(BAS3) + Sum(MAR3) + Sum(TAX3) + Sum(BAS4) + Sum(MAR4) + Sum(TAX4) + Sum(BAS5) + Sum(MAR5) + Sum(TAX5) - [  = 3,5 1 Sum(BAS(imp)) - Sum(TARIFF)]

One-country input-output model CoPs ∑ Output ofi= intermediate demand final demand A*X t Y XXX where B=(I-A) Properties of B Biji is the amount of i that must be produced to supply final demand with an extra unit of i, holding all other final demands constant B:≥0,B:≥ for all i and j 8

8 One CoPS -country input-output model 1 2 i ij j i j X a X Y , i , ,...,n = + =  Output of i = intermediate demand + final demand X A* X Y = + ( ) 1 X I A * Y − = − X B*Y = where 1 B (I A)− = − Properties of B Bij is the amount of i that must be produced to supply final demand with an extra unit of j, holding all other final demands constant 0 1 B , B for all i and j ij ii  

Leontief paradox CoP Labor content in U.S. exports LiE=l′*B*E Capital content in U.S. exports: KinE=kbe Labor content in U.S. imports LinM=1′兴BM Capital content in U.S. imports: KinM=kB*M where I and k' show labor and capital input per unit of output in each U.S. industry LinE P arado. for the us in 1947 Kine Kin Leontief, wassily(1953),"Domestic Production and Foreign Trade; The american Capital Position Re-Examined", Proceedings of the American Philosophical Society, 97(4): 332-49

9 CoPS Leontief paradox Labor content in U.S. exports: L E *B*E in = l Capital content in U.S. exports: K E B*E in k * =  Labor content in U.S. imports: L M *B*M in = l Capital content in U.S. imports: K M B*M in k * =  where l  and k show labor and capital input per unit of output in each U.S. industry Paradox: L E L M K E K M  in in in in Leontief, Wassily (1953), “Domestic Production and Foreign Trade; The American Capital Position Re-Examined”, Proceedings of the American Philosophical Society, 97 (4): 332–49. for the US in 1947

Corden's effective rates of protection (CoPs ∑nP,j=12m Value added per Pric Cost of intermediate unit output in j inputs Set quantity units so that 1+t: for all j where t, is the rate of tariff on imports of ∑a“(1+t),j=1,2,n Effective rate of protection for commodity j (ER indicates by how much Vi is inflated by tariffs ER ∑n1“(t),j=1,…m Corden, WM.(1966), "The structure of a tariff system and the effective protective rate Journal of political Economy 743), June, pp. 221-37

10 Corden’s CoPS effective rates of protection 1 2 j j ij i i V P a * P , j , ,...n = − =  Value added per = Price − Cost of intermediate unit output in j inputs Set quantity units so that: 1 P t for all j j j = + where j t is the rate of tariff on imports of j j j ij i (1 1 1 2 ) ( ) i V t a * t , j , ,...n = + − + =  Effective rate of protection for commodity j (ERj ) indicates by how much Vj is inflated by tariffs. ( ) ( ) 1 2 j j ij i i ER t a * t , j , ,...n = − =  Corden, W.M. (1966), “The structure of a tariff system and the effective protective rate”, Journal of Political Economy 74(3), June, pp. 221-37