How to Change an Elasticity Parameter in the UNI-CGE Model
This guide shows you how to change the value of an elasticity parameter in the UNI-CGE model. Download a PDF version of the guide
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Elasticities in the Country Data File
Elasticities are parameters in the CGE model that define the responsiveness of consumers and producers to changes in prices and income. Parameter values have an important role in driving model results. Larger values lead to larger impacts of a shock on the economy, and vice versa.
A country database includes default values of elasticity parameters. You may want to change one or more elasticity values if you have better information on the appropriate values, or if you want to check the sensitivity of your results to the assumed elasticity values.
To do so, you can follow these directions for any country file that you are using in the UNI-CGE model.
Change the Elasticity Parameters
Download and open the Excel data file for the country you are studying. The bottom of the Excel file has a list of all worksheets in the file (Figure 1). Choose the worksheet named “ELAST’”.
Figure 1. Worksheets in a country data file
The
elasticity worksheet reports four elasticities used in the model:
ESUBQc – the domestic-import (Armington) substitution elasticity for
commodity c
ETRAXc - the domestic-export substitution
elasticity for commodity c
ESUBVAa – the factor substitution elasticity for production activity
a
EDEc – foreign demand elasticity
To change an elasticity, overwrite the value with a new value. For example, change the ESUBVA, the factor substitution elasticity in the services activity, from 0.8 to 10.
The
elasticity parameter values in the worksheet and shown in Figure 2 are
the default values that come with the US333 data file and are used in the
hands-on modeling exercises.
Figure 2. Default elasticity parameter values in the US333 database
LES and Cobb-Douglas Parameters
The UNI-CGE model uses a linear expenditure system (LES) to describe private household demand. The LES requires income elasticities of demand by commodity and household type (LESELASc,h). It also requires a Frisch (FRISCHh) parameter for each household type, which defines the share of private household expenditure that is spent on subsistence requirements. Our US333 database has only one household type.
The Excel country data file includes two worksheets that contain the
parameters for the LES demand system: LES and LES-CD (Figure 3). First, choose the worksheet named “LES’”.
Figure 3. Worksheets with LES and Cobb-Douglas demand parameters
The default values for these parameters are reported in Table 1. The Frisch value of -2 indicates that some share of US consumers’ expenditures are for necessity goods. The LESELAS parameters (the income elasticities of demand) describe AGR as an inferior good with an elasticity of less than one. MFG and SER are luxury goods, with income elasticities of demand greater than one.
| LES default | Cobb-Douglas | ||
|---|---|---|---|
| Frisch | -2 | Frisch | -1 |
| LES | LES | ||
| c-AGR | 0.5 | c-AGR | 1 |
| c-MFG | 1.5 | c-MFG | 1 |
| c-SER | 1.5 | c-SER | 1 |
The LES-CD
worksheet shows the LES parameter values that transform the LES demand system
into a Cobb-Douglas utility function. Inclusion of the LES-CD worksheet is just
for your information on the parameter values needed to use a Cobb-Douglas
function in your model. The LES-CD worksheet is not read into the UNI-CGE
model.
If you want
to use a Cobb-Douglas consumer demand function, you must overwrite the LES
parameter values on the LES page with the Cobb-Douglas parameter values. You
can learn more about LES and Cobb-Douglas in the household demand lecture in
the module on Demand.
Save and Close the Data File
After you change an elasticity or the Frisch parameter, save and close the Excel
country data file before you run the model.
** Important – SAVE your data file before running the model.
** Important – CLOSE the data file before running the model
** Important – Remember that you have changed the elasticity in your
model. You may want to restore the
default values and save the Excel file again.
Verify the New Elasticity Value
The UNI-CGE model includes a command to display all elasticity parameters. After you run the model, verify that your new elasticity value is used in the model by checking the displayed values in the listing file (.lst file). The .lst file is created after the model is solved and should open on your screen automatically. (If not, check the settings in the getting-ready guide on downloading GAMS and the CGE model).
Follow the 5 steps in Figure 4 to search for, view and verify the new
elasticity parameter value. In this example, you are shown how to verify
parameter ESUBQ, the Armington elasticity of import demand.
Figure 5. View and verify elasticity parameter values in the .lst file
Restore Default Elasticities
The
default elasticity values are the parameter values that are included in the
Excel data file. If you have changed an elasticity parameter and want to
restore the default values, open the Excel country data file, overwrite the new
values with the original values, and save and close the file.
It is a good practice to follow the checklist before running the CGE model, and
to verify the elasticities after running the model. It is a (common) mistake to
run new experiments without realizing the elasticities have been changed.
Copyright Cornerstone CGE 2004 CC 4.0 BY-NC-SA