Download Model Exercise: Pandemic Spending - What Happened When We Stayed Home During Covid HERE (342.4 KB)

Download Answer Key HERE (105.0 KB)

SUMMARY

During the Covid pandemic, many people chose to, or were required to, stay home and isolate.  Demand for services like restaurant meals, gym sessions and movies at the theater dropped precipitously. Instead, people at home purchased goods to use for things like home improvements, supplying home offices and pursuing hobbies.

A change in consumer demand patterns leads to changes in the kinds of goods and services an economy produces, imports and exports. In turn, the macro economy changes when structural changes occur in the composition of consumer demand, production, and trade.

In a CGE model, consumer preferences are described by a utility function. The UNI-CGE model uses the Stone-Geary utility function/LES demand system to describe consumer behavior. The LES divides consumer demand into a necessity component and discretionary spending. Defining the Frisch parameter with a value between -1 and larger absolute values, such as -4, determines the shares of necessary and discretionary spending in the consumer basket. 

In this exercise, you will learn how to change consumer preferences by changing marginal budget shares in the consumer basket. First, you will examine the impacts of the preference change when all spending is discretionary, none is for necessities. Then you will explore the sensitivity of results when the Frisch parameter describes households that spend on both necessities and discretionary items.