Geoscience Reference
In-Depth Information
Details of the model may be found in Kim et al. (
2013
); on the demographic side,
the most relevant characteristics are the disaggregation of population into eight age
cohorts: 0-9, 10-19, 20-29, 30-39, 40-49, 50-59, 60-69, and an 70+ age group. Each
age cohort carries different parameters and values for labor productivity, mortality
rates, and participation rates in the labor market (i.e., share of labor supply relative to
total population size) on the supply side, and saving rates and consumption behaviors
on the demand side. Each regional labor input by age cohort is assumed to be
homogeneous and to possess intersectoral mobility, whereas it is assumed that capital
stock cannot move from one region to another. The labor demand by various regions
and industry is derived from the producers' value-added maximization of the first
order conditions, whereas labor supply relies on the participation rates of the various
age cohorts and the total population size of the region overall. The labor productivity
by region and working age group is estimated through a form of Mincerian earning
regression, in which the determinants of the productivity are gender, education level,
job experience, type of occupation and industrial sector, and possession (or lack
thereof) of a professional license. Under the neoclassical closure rule for the labor
market, the labor participation rate is derived by balancing out total labor demand
against total labor supply. If the population flows among the regions are not
exogenous to the model, then in-migration is assumed to be in response to interre-
gional differences between origin and destination regions in terms of wage per capita
and unemployment rate, as well as the physical distance between the regions. Hence,
the population of a given region is the sum of the natural growth of the native
population combined with the net gain (or loss) of migrant populations.
Two tiers of government structure are specified in the model: two regional
governments and one national government. Government expenditures consist of
consumption expenditures, subsidies to producers and households, and savings.
Revenue sources include taxation of household income, value-added, and foreign
imports. With regard to the macroeconomic closure rule for the capital market,
aggregate savings determines investments. There is one consolidated capital mar-
ket, consisting of household savings, corporate savings of regional production
sectors, private borrowings from abroad, and government savings. There are no
financial assets in the model, so overall consistency requires equating total domestic
investment to net national savings plus net capital inflows. The sectoral allocation
of total investment by destination is endogenously determined by the capital price
from each sector and the allocation coefficient of investment. The investment
allocation by destination is transformed into the sectoral investment by origin
through a capital coefficient matrix. This price adjustment is required for the
Walrasian equilibrium condition, and every price is measured on a relative scale.
The ICGE model is a recursive and adaptive dynamic model, composed of a
within-period model and a between-period model. The within-period model
determines equilibrium quantities and prices under objectives and constraints for
each economic agent, in which the balance between supply and demand is achieved
in a perfectly competitive market. The between-period model finds a sequential
equilibrium path for the within-period model over the multiple periods by updating
the values of all exogenous variables, such as government expenditures, from one
period to another. For example, the current capital stock is expanded with new
