Trade - GRACE
Total domestic output is distributed between export and domestic markets. In the core version of the GRACE model, domestic and export supplies are treated as perfect substitutes in production. In contrast, imported and domestically produced commodities are assumed imperfect substitutes. Following the Armington approach, we use a CES function to depict imperfect substitutability between imports and domestically produced goods, so that domestic and imported goods comprise the so-called Armington aggregate. In a two-level Armington aggregate, the first level depicts substitution in imports between regions, and the second level describes substitution between imported and domestically produced commodities. The Armington elasticities of substitution are obtained from the MIT EPPA model. Furthermore, importing countries pay a price premium to the international transport sector. This price premium is determined by a fixed transport factor derived from the base year data. The supply of international transport services is depicted by a Cobb-Douglas aggregate of the service good from the individual regions. The Armington aggregate is then distributed between private, public, investment, and intermediate consumption.
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|Institution||Center for International Climate Research (CICERO), Norway, https://cicero.oslo.no/en.|
|Solution concept||General equilibrium (closed economy)|
|Solution method||SimulationRecursive dynamic solution method|