Development, Trade and Resources in Asia
5. Applied general equilibrium models and methods 5.1 INTRODUCTION The magnitudes of natural resource and environmental degradation values in relation to developing economy GDP have frequently been estimated to be quite large (Chapter 1). These relative magnitudes are due to the importance of the sectors using environmental and natural resource (ENR) assets intensively, particularly agriculture, in relation to the total size of the economy. We have argued that these magnitudes, along with the factor and product market links that connect resource sectors to the overall economy, merit a general equilibrium approach to the measurement of the economic implications of environmental change. In general equilibrium, all prices are assumed to vary endogenously; in general equilibrium, given competitive markets, prices vary until all markets clear. Thus ‘general equilibrium takes account of all of the interactions among markets, as well as the functioning of the individual markets’ (Varian 1992: 313). In practice, computational and information constraints limit the ‘generality’ of the general equilibrium approach. Economists concerned to capture general equilibrium processes face a trade-oﬀ between analytical clarity, which requires very highly simpliﬁed models, and meaningful numerical results, which require large, very detailed computational models. In Chapters 2–4 we presented the former type of model, to identify and understand fundamental intersectoral and interregional linkages and the mechanisms through which economic ‘shocks’ are transmitted. In the following chapters we present three examples of the latter approach: relatively large, numerical applied general equilibrium (AGE) models, from which we can obtain simulation results that stand...
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