Model concept, solver and details - EPPA

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The model represents economic activities of three types of agents in each region: producers, consumers, and the government. Solving the model recursively means that production, consumption, savings and investment are determined by current period prices. Savings supply funds for investment, and investment plus capital remaining from previous periods forms the capital for the next period's production. The model is formulated in a series of mixed complementary problems (MCP), which may include both equations and inequalities. It is written and solved using the modeling languages of GAMS and MPSGE, and the latter is now a subsystem of the former (Rutherford, 1999)[1].

In the recursive formulation, the model finds prices, quantities and incomes that represent an equilibrium in each period by solving an optimization problem for three types of agents in each region: the household, producers, and the government. The household owns primary factors including labor, capital, and natural resources, provides them to producers, receives income from the services it provides (wages, capital earnings and resource rents), pays taxes to the government and receives net transfers from it. In addition, representative regional household allocates income to consumption and savings.

Producers (production sectors) transform primary factors and intermediate inputs (outputs of other producers) into goods and services, sell them to other domestic or foreign producers, households, or governments, and receive payments in return. To maximize profit, each producer chooses its output level, and—under the given technology and market prices—hires a cost-minimizing input bundle. Production functions for each sector describe technical substitution possibilities and requirements. The government is treated as a passive entity, which collects taxes from household and producers to finance government consumption and transfers.

The activities of different agents and their interactions can be described by three types of conditions: 1) zero profit conditions; 2) market-clearing conditions; and 3) income balance conditions. Zero-profit conditions represent cost-benefit analyses for economic activities. For the household, the economic activity is consumption that produces utility and for each producer, the activity is production, which results in output.

Alert-warning.png Note: The documentation of EPPA is 'in preparation' and is not yet 'published'!
Model Documentation - EPPA
Corresponding documentation
Model information
Institution Massachusetts Institute of Technology (MIT), USA,
Solution concept General equilibrium (closed economy)
Solution method Optimization
  1. Rutherford, T.F., 1999. Applied general equilibrium modeling with MPSGE as a GAMS subsystem: an overview of the modeling framework and syntax. Comput. Econ. 14, 1–46.