Economic modelling makes it possible to provide, ex-ante, a
quantitative estimation of an economic policy reform (or a specific exogenous
shock) on an economic sector, an economy, a region of the world, or the world
economy. Economic modeling can help structure the debate around political
reform, in particular by identifying the channels through which the effects of
a political decision is transmitted to the well-being of economic agents, and
the importance of these channels.
Economic modeling is based upon the following components:
(i) economic theory as far as the relations between economic variables are
concerned; (ii) economic data to calibrate the model based upon real-life
information; (iii) an econometric estimation of the importance of the relation
between economic variables (behavioral parameters).
The two main pillars of economic modeling are partial
equilibrium models and general equilibrium models.
In partial equilibrium models, the functioning and equilibrium
of some markets (in particular factor markets) are not taken into account. The
advantage is to simplify the component of the model that is of less interest to
the modeler. This can help to more accurately analyze an economic mechanism or
a policy in the sector(s) that are priorities for the modeler. This also allows
more transparent results of the model. This simplifying hypothesis comes
at a cost which is the failure to take into account what is happening for
markets of productive factors (labour, capital, land).
In general equilibrium models, the equilibrium on all
markets is considered. For illustration, when a policy reform of the wheat
market is studied, its impact on the labor and land markets is taken into
account, but also the impact on public revenues, households, and upstream and
downstream sectors. The feedback impact of all these changes on the wheat
market is also considered. While this means that general equilibrium models are
consistent, they are more complex than partial equilibrium models. The
transparency they offer comes at the cost of analyzing many economic variables
The objective of this course is to enable people to
understand how partial equilibrium models and general equilibrium models are
designed and programmed. The target audience of this online course on economic
modeling will be people interested in economic modeling through their jobs in
research centers, ministries, international institutions, and non-governmental
organizations, for research projects that rely upon estimation of the economic
effects of policy reform. All participants should have knowledge of economic
theory and the use of macroeconomic data. They should also be familiar to the
programming under GAMS. If unfamiliar with GAMS, there is a set of
helpful tutorial videos courtesy of AGRODEP linked here.