The WEGC-computable general equilibrium (WEGC-CGE) model is a global, multi-regional macroeconomic model that depicts the economy as a closed system of monetary flows across production sectors and demand agents on a yearly basis. It captures the interlinkages within the economy using national input-output tables as one core data base (The WEGC-CGE model is calibrated on different versions of the GTAP database). In general, the CGE approach allows for empirical evaluation (i.e. interpretations of simulations) based on micro-consistent economic theory. Compared to sectoral models, CGE models provide a ‘more comprehensive’ (i.e. overall) approach and enable to assess the macroeconomic (feedback) effects of e.g. substantial policy intervention or new technologies. In the TRANSrisk project the macroeconomic effects of climate change mitigation pathways are assessed.
What does the model do?
The basic functioning of the model is the following: The model solves numerically to find a combination of supply (and demand) quantities and relative prices in order to clear all markets simultaneously. The underlying mechanisms are depicting behavioural assumptions regarding producers (sectors) who minimise their production costs and consumers who maximise their utility out of consumption (under a given budget constraint). The model is calibrated to a ‘benchmark equilibrium’ to reproduce the data of a certain base year. Then comparative static analysis is carried out by ‘shocking’ the model exogenously (e.g. policy simulation), triggering adjustments in prices and quantities until all markets clear again. The emerging new equilibrium depicts the state of the economy after the policy/simulation/shock and is compared to the initial benchmark equilibrium.
What kind of questions can the model address?
The WEGC-CGE model can be used to address a broad spectrum of research questions which aim at analysing macroeconomic effects. Typical research topics are the sectoral and macroeconomic effects of (climate) policies such as taxes or subsidies, economic consequences of technological change, questions connected to carbon leakage or the valuation of climate change impacts.
What kind of answers can the model provide?
Generally speaking, the WEGC-CGE model provides answers regarding economy-wide feedback effects triggered by e.g. policies, technological change or climate change impacts. Typical indicators to measure these effects are changes in GDP, welfare, relative prices of goods, services and factors, sectoral activity (i.e. supply), demand (final as well as intermediate) or emissions.