Hello everyone,
My name is Rodrigue. Many thanks to the administrators of this new forum.
I have built a CGE model that replicates the benchmark properly. However, I observed that during the simulation, changes in some variables in a CES function are not correct. Let me consider the following equation for illustration :
Z = [a. X^p + (1-a).Y^p]^(1/p)
Where X, Y and Z are variables,
a is a share parameter and p the CES substitution parameter.
From this equation I derived the following one
Y = X.[(1-a)/a]^(1/(p-1)) with p>1
which is the central equation written in GAMS after calibrating the parameter “a” by
a = X^(p-1)/[X^(p-1)+ Y^(p-1)]
My problem relies on variable Y. The value of X being determined in another equation.
When I run the GAMS code for simulations, I observed that the percentage change in Y is exactly the same as the change in X.
I think that normally changes in X should be different from changes in Y during the computation process due to elasticity values and the share parameter. The equality holds only for a =0.5 yet in my code, all the values of a are different from 0.5.
So, can someone explain me what is wrong with my code?
I will really appreciate your help.
With regards,
Rodrigue