Learning Outcome:

After completing this lesson, you will be able to define behavioral and identity equations and their roles in a CGE model. 

Behavioral  Equations

Behavioral equations describe the economic decision-making of consumers and producers in the model. The equations are based on microeconomic theories about how these agents behave. For consumers, behavioral equations describe consumers as utility maximizers. They try to achieve the highest possible utility given prices, their budgets and their preferences. For producers, behavioral equations describe profit-maximizing or cost-minimizing behavior given the prices of inputs and outputs. The sizes of behavioral responses to changes in prices and income depend on the elasticity parameter values that the modeler has assumed.  

Identity Equations

Identity equations define accounting relationships among variables in the model.  Variables and parameters are defined as the sum or product of other variables or parameters. For example, CGE models include familiar national accounting identities, such as the composition of GDP expenditure:

GDP = C + I + G + X - M

Other identity equations act as constraints that ensure model equilibrium.  An example of a market-clearing constraint is this equation, which constrains the total supply of labor (QFS_L) to equal the  demand for labor before and after the model shock:.  

 QFS_L = Sum(A, QFE_L,_A)

where total labor demand is the sum of production activities' demand for labor (QFE_L,A). 

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