Computable General Equilibrium (CGE) Model
Also known as: computable general equilibrium, applied general equilibrium model, Hesaplanabilir Genel Denge Modeli (CGE)
A Computable General Equilibrium model is a numerical equilibrium framework that represents the input-output relationships among all sectors, factors of production, households, and foreign trade in an economy through a Social Accounting Matrix (SAM). Grounded in Walrasian general equilibrium theory and formalised in the standard IFPRI model of Lofgren, Harris and Robinson (2002), it simulates the economy-wide effects of policy shocks such as tax reform, trade liberalisation, or environmental policy.
Key highlights
- Captures economy-wide, cross-sector spillovers of a policy shock instead of a single isolated market.
- Built on explicit Walrasian general equilibrium theory with market clearing in every market.
- Flexible: production can use CES, Cobb-Douglas, or Leontief forms, and the framework supports both static comparative analysis and dynamic capital-accumulation variants.
Intuition
This section is available to Pro members. Upgrade to Pro
How it works
This section is available to Pro members. Upgrade to Pro
When to use it
Use a CGE model when you need to evaluate the economy-wide consequences of a policy shock and the channels run through many interlinked markets rather than a single one. It is the natural tool for tax reform, trade liberalisation, or environmental policy analysis where price changes in one sector ripple through production, household income, and trade. It requires a consistent and up-to-date SAM, calibrated production functions, and elasticity parameters drawn from the literature or econometric estimates. A static CGE supports a single-period comparative analysis; a dynamic CGE adds capital accumulation and growth.
Strengths & limitations
- Captures economy-wide, cross-sector spillovers of a policy shock instead of a single isolated market.
- Built on explicit Walrasian general equilibrium theory with market clearing in every market.
- Flexible: production can use CES, Cobb-Douglas, or Leontief forms, and the framework supports both static comparative analysis and dynamic capital-accumulation variants.
- Results are only as reliable as the underlying SAM; an inconsistent or outdated SAM undermines the whole model.
- Outcomes are sensitive to the elasticity parameters, which must be calibrated or taken from the literature rather than estimated within the model itself.
- It is a calibrated equilibrium framework, not a sample-based statistical estimator, so it carries no built-in measure of statistical uncertainty.
Common pitfalls
This section is available to Pro members. Upgrade to Pro
Applications
This section is available to Pro members. Upgrade to Pro
Frequently asked
What is a Social Accounting Matrix (SAM) and why is it central?
A SAM is a square, balanced table recording all the transactions in an economy in a base period: who pays whom across sectors, factors, households, government, and the rest of the world. It is the data a CGE model is calibrated to, so a consistent and up-to-date SAM is a prerequisite for trustworthy results.
How is a CGE model different from a regression?
A regression estimates parameters from a sample and reports statistical uncertainty. A CGE model is calibrated so that its equations exactly reproduce a base-year SAM, then solved as a system of equilibrium equations. It is a structural simulation tool, not a sample-based estimator, so its credibility rests on the SAM and the chosen elasticities.
What is the difference between static and dynamic CGE?
A static CGE compares two single-period equilibria, before and after a shock, holding capital fixed. A dynamic CGE adds capital accumulation and growth over time, tracing the transition path rather than just the endpoints.
Why does a CGE model need a numéraire?
Because of homogeneity, only relative prices are determined in general equilibrium. The model therefore fixes one price (or a price index) as the numéraire to pin down the absolute price level; by Walras' law one market-clearing condition is then redundant.
Sources
- 1.Lofgren, H., Harris, R.L. & Robinson, S. (2002). A Standard Computable General Equilibrium (CGE) Model in GAMS. IFPRI Microcomputers in Policy Research, 5.
- 2.Hosoe, N., Gasawa, K. & Hashimoto, H. (2010). Textbook of Computable General Equilibrium Modelling: Programming and Simulations. Palgrave Macmillan.
- 3.Dixon, P.B. & Jorgenson, D.W. (Eds.) (2013). Handbook of Computable General Equilibrium Modeling, Vols. 1A & 1B. North-Holland.
You have read it. What now?
Cite this page
ScholarGate. (2026, June 1). CGE Model. ScholarGate. https://scholargate.app/econometrics/cge-model