From Theory to Application: A Computable General Equilibrium Model

  • Hans Fehr
  • Christoph Rosenberg
  • Wolfgang Wiegard


We are now equipped with some theoretical insights into the welfare effects of value-added taxes in open economies. We know that international income effects as well as domestic and international substitution effects matter and we have elaborated on the determinants of these effects. Theoretical reasoning alone, however, does not tell us much about the quantitative significance of these effects, which are exactly what we are interested in. Which countries realize welfare gains, and which suffer welfare losses, when the EU switches from one international taxation principle to another? Furthermore we want to know whether or not welfare changes are quantitatively significant, and what counts more for welfare changes, international income effects or efficiency considerations due to substitution effects? In Chapter I we argued that computable general equilibrium (CGE) models were the best way of answering these and related questions. Hence, the aim of the present chapter is to develop and describe our computable general equilibrium model in more detail.


Producer Price Computable General Equilibrium Computable General Equilibrium Model Substitution Elasticity Origin Principle 
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  1. 57.
    For a more complete introduction and an overview of the literature see, for example, Shoven and Whalley (1984, 1992) or Borges (1986). Public sector issues are surveyed in Shoven (1983) and Piggott (1988); Bovenberg (1987) evaluates the significance of CGE methodology for public policy.Google Scholar
  2. 58.
    See, for example, OECD (1990, 1993) or Nguyen, Perroni and Wigle (1993).Google Scholar
  3. 60.
    For details of this procedure see Keller (1976), for example.Google Scholar
  4. 61.
    If world capital is heterogeneous (i.e. there is a world market for capital from every possible source country), a further nest would have to be added to the production tree. After having determined their overall capital demand, firms would then choose their optimal capital use from different countries according to the respective national rental rates. The exact modelling of this variant can be found in Fehr, Rosenberg, Wiegard (1991).Google Scholar
  5. 64.
    Price indices are derived by rearranging the indirect utility function to fulfill the budget constraint. For details see Keller (1976).Google Scholar
  6. 66.
    The theoretical literature relies mostly on the so-called “gross barter terms of trade”, a quantity index. In large-scale empirical models, however, this definition seems less practicable. See Allen and Ely (1953, pp. 207–209) or Kemp (1968) for a discussion.Google Scholar
  7. 67.
    Whalley (1985, p. 130) uses domestic production quantities as weights, obviously in order to correct for distortions by tariffs already in place in the base year.Google Scholar
  8. 68.
    St-Hilaire and Whalley (1983, 1987) give a more complete description of what is involved in constructing micro-consistent data sets.Google Scholar
  9. 73.
    Compare Boomsma et al. (1991) for a comment on this phenomenon which is sometimes referred to as the mirror puzzle.Google Scholar
  10. 74.
    Greece, which was a member of the EU in 1981, is excluded because of data difficulties.Google Scholar
  11. 75.
    For France we used input-output tables from 1965, for Italy those from 1970, and for Belgium those from 1975.Google Scholar
  12. 76.
    See Bacharach (1970) for details.Google Scholar
  13. 78.
    The reader is referred to the interchange between Bergstrom (1976) and Hoffman (1977).Google Scholar
  14. 78a.
    Harrison, Rutherford, Wooton (1991, p. 100)Google Scholar
  15. 78b.
    Harrison, Rutherford, Wooton (1991, p. 101)Google Scholar
  16. 78c.
    Whalley (1985, p. 100)Google Scholar
  17. 78d.
    Ballard, Fullerton, Shoven, Whalley (1985, p. 135)Google Scholar

Copyright information

© Springer-Verlag Berlin · Heidelberg 1995

Authors and Affiliations

  • Hans Fehr
    • 1
  • Christoph Rosenberg
    • 2
  • Wolfgang Wiegard
    • 1
  1. 1.Department of EconomicsUniversity of TübingenTübingenGermany
  2. 2.International Monetary FundUSA

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