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p. 34 of 36 BACK | NEXT Foreword 1. Developing Asia and the world II. Economic trends and prospects in developing Asia III. Developing Asia's imprint on global commodity markets Appendix Statistical notes and tables ADO forecasting performance for GDP growth and inflation

Asian Development Outlook 2006 Update

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Appendix

GEMAT: A Global General Equilibrium Model

GEMAT (General Equilibrium Model for Asian Trade) is an applied general equilibrium model of the global economy, with a focus on Asia. It has strong micro-foundations and captures detailed interactions among industries, consumers, and governments, across the global economy. GEMAT is ideally suited for the analysis of structural changes over periods that are sufficiently long to allow markets to adjust and rigidities to work themselves out.

In GEMAT, producers in each industry are assumed to maximize profits and a representative household in each country or region maximizes its utility. In each (annual) period, relative prices equate demand and supply for all goods and factors of production—given resource endowments, technology, taste, substitution parameters, and taxes and subsidies. Mobile factors of production are allocated in a way that promotes equalization of factor prices across sectors. Labor is immobile across countries as is capital, once invested. For fixed foreign saving, external balance is assured by adjustment of the real exchange rate. Finally, domestic investment is determined by the availability of domestic and foreign saving. GEMAT models only the “real” economy and does not explain nominal variables such as inflation. The numeraire is the global consumer price index, which is assumed to be constant. Letting it grow simply scales all nominal variables equi-proportionately, and leaves real variables unchanged.

Based on the latest release of the Global Trade Analysis Project (GTAP) database (version 6.2), GEMAT provides a detailed disaggregation of commodities. In the model, the supply of each commodity percolates up from producers’ decisions on profit-maximizing levels of output. Demand is an amalgam of producers’ and consumers’ decisions, domestic and foreign, on optimal levels of demands for intermediate, capital, and consumption goods. For those commodities that exploit resources, resource supplies enter the production function as a primary factor. GEMAT features a resource-depletion module for coal, crude oil, and natural gas to capture the long-term dynamics of energy resource supply, following the Green model of the Organisation for Economic Co-operation and Development (Lee, Oliveria-Martins, and van der Mensbrugghe 1997). The production of energy from reserves is price responsive, as higher prices encourage investment in retrieving highercost (usually less-accessible) sources of supply. In GEMAT, there are differentiated production structures for agriculture, primary energy, oil refining, electricity, and other industry and services sectors. This follows the treatment in the MIT Emissions Prediction and Policy Analysis (EPPA) model (Paltsev et al. 2005).

GEMAT solves recursively from its base year, 2001, to 2015. The model captures long-term equilibrium tendencies in product and factor markets, abstracting from short-term adjustment and fluctuations. The version of GEMAT used in this section aggregates the world economy into 16 regions (including 10 Asian countries/regions), shown in Table A1; 28 economic sectors; and four primary factors (capital, labor, land, and other natural resources).

Although assumptions have been combined and their aggregate impact is reported in Table A4, care should be taken in comparing “shocks” with each other, since they are not necessarily of equivalent size. Given the comparative price inelasticity of demand relative to supply, supply (demand) shocks tend to have a bigger (smaller) impact on prices and a smaller (larger) impact on quantities.

Appendix References

Hertel, Thomas W., Carlos E. Ludena, and Alla Golub. 2006. “Economic Growth, Technological Change and the Patterns of Food and Agricultural Trade in Asia.” Center for Global Trade Analysis, Purdue University.

Lee, Hiro, Joaquim Oliveira-Martins, and Dominique van der Mensbrugghe. 1994. “The OECD Green Model: An Updated Overview.” OECD Development Centre Working Paper No. 97. Paris.

Paltsev, Sergey, John M. Reilly, Henry D. Jacoby, Richard S. Eckaus, James R. McFarland, Marcus C. Sarofim, Malcolm O. Asadoorian, and Mustafa H.M. Babiker. 2005. The MIT Emissions Prediction and Policy Analysis (EPPA) Model: Version 4. MIT Joint Program on the Science and Policy of Global Change. Report No. 125, August. Cambridge, Mass.

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