Saturday, July 18, 2015

The CGE Simulations with Labor Market Shock

We have an hypothetical economy in which there are two industry which produces two commodities. These industries employ the labor and capital as factor of production. Household provides these factors of production to the firms. In return firm pays the payment to Household. The household consumes all their income in this hypothetical economy. The household also demands and consume the commodities produced by firm. The utility of Household is Cobb Douglas and the production function of Firms is also modeled in Cobb Douglas function.

These relationships in values are given in following IO table.

We develop the Header Array file based on this IO table. See the previous blog (here). The mathematical relationships are discussed and derived (here). The programming of such mathematical relation is modeled (here).

Now, in this blog I want to show you the simulation on this hypothetical economy. I will specifically discuss on what will happen to this hypothetical economy when there is labor market shock? Or Say the labor is expected to grow 10% or reduced by 5% then what happen to total income of household? What happens to the prices of factors of production? What can happen in the industry, which industry will specialized (or grow) and which industry will fade out? To find the detail see this tutorial video.

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