A Method for Integrating Activity Analysis Submodels with Neoclassical General Equilibrium Models

Lundgren, S. (1982). A Method for Integrating Activity Analysis Submodels with Neoclassical General Equilibrium Models. IIASA Working Paper. IIASA, Laxenburg, Austria: WP-82-044

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Abstract

Computable general equilibrium models have become a more common tool in economic analysis as progress in computer science has made efficient solution techniques available. These models are often based on the neoclassical economic theory. One example is that the production possibilities are usually represented by neoclassical production functions.

In certain model applications, however, one is interested in a more disaggregated representation of the production possibilities in one or more of the model sectors. Such disaggregated sector models are primarily activity analysis models.

This paper describes a method for integrating activity analysis submodels with a neoclassical general equilibrium model. The starting point is the well-known efficiency properties of a general equilibrium which permit us to reformulate it as a nonlinear optimization problem. We then have a system of optimization models, and the integration is straightforward.

Some preliminary numerical experience is also reported.

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