CGE

Computable general equilibrium (CGE) models are a class of economic models that use actual data to simulate how an economy responds to policy changes, technology shifts, or external shocks. They aim to capture the interdependencies across sectors, households, firms, and government, solving for prices and quantities so that supply equals demand in all markets simultaneously. CGE models are grounded in neoclassical general equilibrium theory and emphasize how policy or external events ripple through an economy.

CGE models typically combine a social accounting matrix (SAM) or input-output table with detailed behavioral equations. Production is modeled with nested production functions that may use Leontief, Cobb-Douglas, or constant elasticity of substitution (CES) forms; consumption follows demand systems that produce elasticities of substitution among goods and factors. The model is calibrated to a base year using observed data, and parameters are chosen to reproduce the base equilibrium. Once calibrated, the model can simulate how shocks or policy changes alter prices, outputs, wages, and welfare.

There are static CGE models, dynamic CGE models that track changes over time, and recursive dynamic CGE models that advance year by year with repeated equilibrium recalibration. Some CGE frameworks incorporate endogenous capital accumulation, technology adoption, and trade with foreign sectors; they are sometimes augmented with risk or stochastic elements.

Common applications include analysis of tax reform, trade policy, agricultural policy, and climate or energy policy, where intersectoral linkages and distributional effects are important. Limitations include data intensity, reliance on functional form and elasticity choices, and sensitivity to calibration assumptions, which can influence outcomes. Software tools frequently used to implement CGE models include GAMS-based platforms and specialized packages such as MPSGE and GEMPACK.