1 / 19

II. General equilibrium approaches—theory

II. General equilibrium approaches—theory. Geometric models. Standard model of resource allocation, production, trade and welfare An open economy with pollution Measuring pollution and economic welfare. A simple GE model. Assume: Two goods produced and consumed

jkeen
Download Presentation

II. General equilibrium approaches—theory

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. II-B II. General equilibrium approaches—theory

  2. II-B Geometric models • Standard model of resource allocation, production, trade and welfare • An open economy with pollution • Measuring pollution and economic welfare

  3. II-B A simple GE model • Assume: • Two goods produced and consumed • Each good is produced using two factors • Constant returns to scale • One factor (labor) is intersectorally mobile; the others are “specific” to sectors • Markets are complete and competitive • Prices are set in world markets

  4. II-B

  5. II-B Spot test! • Use the diagram to show the value of total income. • For a given set of consumer preferences, show the pattern of trade. • Demonstrate that (a, b) is an equilibrium (hint: Walras’ Law).

  6. II-B

  7. II-B

  8. What happens to factor returns when relative output prices change? Returns to specific factors rise (fall) as sectoral output rises (falls) Wage change depends on labor- intensity of expanding sector II-B Spot test!

  9. II-B

  10. What happens to the structure of output as specific factor endowments increase? What is the effect of technical progress in a sector? The sector using that factor expands--and the other contracts That sector’s output expands, and the other’s output contracts II-B Spot test!

  11. II-B An open economy with pollution • The Antweiler, Copeland, Taylor (2001) diagram • ‘Clean’ and ‘dirty’ goods • Comparative advantage in dirty good • Tariff on imports of clean good • Effects of trade liberalization: • scale • composition • technique

  12. II-B

  13. II-B Factor endowment growth • Scale and composition effects

  14. II-B

  15. II-B Environment and economic welfare • ACT model tells us what happens to pollution. • But consumer utility: u = u(c, -z) • Price or endowment changes affect c as well as z: what is the change in net welfare? • example: trade liberalization

  16. II-B

  17. II-B Spot test! Q. In the previous example, what is the optimal tariff, and how is it calculated? • Where absolute values of slopes of R and C are equal (marginal environmental benefit=marginal cost in terms of consumption) • Q. What is the optimal tariff on imports of a dirty good? • A. t = 0.

  18. II-B Summary and conclusions • Assumptions about optimizing behavior • Assumptions about markets and technology • Assumptions about trade • Models must make assumptions explicit and be demonstrably consistent • Complications can be introduced, but at a cost • Target of analysis is important. Is it the environment only? Or a broader concept of welfare?

  19. II-B For next sessions • Review duality and basic concepts, if necessary • Buffie, or equivalent. • Look at OEE Ch. 2 models, and/or Ulph (1999).

More Related