Hi all,

I’m implementing a CGE model in GAMS using NONOPT for NLP programming. The model worked well until I decided to incorporate the external sector taking into account the imports and exports. Indeed, the benchmark was reached properly without the external sector. Now that I incorporate it into the model the benchmark equilibrium is no longer found even though the process window displays no error. The behaviour of exports (ex(i)) has been modelled by

eqex(i)… ex(i) =e= coefex(i)*pm*nivex;

where coefex(i) is a parameter which captures the proportion of good I exported, nivex is a variable representant the total exports in volume. Pm is the price of exportation.

Concerning the imports, I derived it demand function from a cobb Douglas utility function that follows the Armington assumption

y(i) = mu(i)*(Q(i)**eta(i)*im(i)**(1-eta(i)))

The solution of the minimisation program p(i)*Qt(i) + pm*(1+r(i))*im(i)
gave im(i) and Qt(i) equations representing respectively the import and composite demands of good I as follows:
eqm(i)… im(i) =e= (y(i)/mu(i))*(p(i)

*(1-eta(i))/(pm*(1+r(i))

*eta(i)))*(1-eta(i)));

**(eta(i));**

eqQ(i)… =e= im(i)(eta(i))/(p(i)eqQ(i)… =e= im(i)

*pm*(1+r(i))I calibrated eqm(i) from technological parameter mu(i) by:

mu(i) = y0(i)*(1/im0(i))*(p0(i)*(1-eta(i))/(pm0*(1+r(i))*eta(i)))**eta(i);

where y0(i), p0(i), pm0(i) are the benchmark values of total production y, the price of local good p(i) and the price of imported good pm. r(i) represents the tariff rate.

The question is why is the benchmark equilibrium not established? For example, prices at the first simulation should be unity but it is not the case. Is it the problem of calibration? Or the issue of incorporating of the three previous equations?

I will really appreciate any suggestion to overcome this

The Gams file is given in attached

Rodrigue

CGE5.gms (10.1 KB)