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goods, represented by a one level Constant Elasticity of Transformation (CET)
function. The small country assumption is relaxed with the export demand function.
The model allows for non-traded, non-produced and non-consumed domestic goods.
The main model structures are discussed for different
institutional blocks as
described below.
10.4.1 Consumer
Consumer maximizes utility in a Cobb-Douglas form with constant returns to scale
subject to a budget constraint. The household commodity consumption can be
represented as:
PQD
i
QCD
i
¼
Comhav
i
HEXP
ð
10
1
Þ
:
where
PQD
i
: The purchase price of composite commodity i;
QCD
i
: Household consumption by commodity i;
Comhav
i
: Household consumption shares of commodity i in household;
HEXP: Household consumption expenditure in household.
Household income and household expenditure are denoted respectively as:
X
f
k
¼
1
hvash
k
YH
¼
YF
k
þ
hwor
ER
ð
10
2
Þ
:
HEXP
¼
YH
ð
1
tyh
Þ
ð
1
SADJ
kaphsh
Þ
ð
10
3
Þ
:
where
YH: Household income;
hvash
f
: Share of income from factor f to household;
YF
k
: Income to factor f;
hwor: Transfers to household from ROW (constant in foreign currency);
ER: Exchange rate (domestic currency per world unit);
tyh: Direct tax rate on household;
SADJ: Savings rate scaling factor. The value assumes 1 in this study;
kaphsh: Shares of household income saved after taxes of household.
10.4.2 Producer
There are 13 firms that produce one commodity each, maximize their profits and
face a nested production function, with capital, labor and inter-industry flows as
factors of production. A two-stage production structure applies for producers in all
sectors (See Fig.
10.2
). The top level assumes Leontief technology with value
added and intermediate inputs as factors of production The second level assumes
value added CES technology with capital, labor and other endowments as factors of
production, and intermediate inputs as a Leontief technology with the commodities
