In addition as discussed above, transport costs also have an influence on wage levels and
productivity through the effects of pecuniary and technological externalities. These effects
derived from externalities add to the direct effects on the regional economy of changes in
transport costs.
These direct effects on commodity prices and income, which include the effects derived
from externalities, lead to a number of derived effects on the regional economy. The
distribution and size of the total effects are, however, not the same as the distribution and size
of the direct effects (including the externality effects). The direct effects on commodity prices
and income are redistributed through the interregional markets for commodities and
production factors, through intra- and interregional trade, shopping and tourism, and through
commuting and disposable income, assuming that price changes are transferred directly to the
consumer. When prices and income change, the end user reacts by adjusting demand, which
influences real economic activity. Therefore the indirect and induced effects should be added
to the direct effects (including the externality effects) in order to estimate the total effects on
regional economic activity.
In order to estimate the total effects, it is necessary to construct an
interregional/subregional general equilibrium model. A subregional general equilibrium
model must include the effects of changes in commodity prices and income arising from
transport cost changes, including the externality effects, and must also include the real
economic reactions to changes in prices and income. In this section, an
interregional/subregional general equilibrium model for Denmark, LINE, is briefly described.
First, the real circle in LINE is presented. This includes modelling the impacts of commodity
price changes and changes in wages on real economic activity. This is followed by a
presentation of the cost-price circle, which include modelling of the changes in regional
commodity prices and income. Finally, the inclusion of both pecuniary and technological
externalities in LINE is considered.
4.1 LINE - an interregional general equilibrium model for modelling redistribution of
productivity changes
Here a brief graphical presentation of LINE is made. The full model and its equations are
described in detail in Madsen et al. (2001a) and Madsen & Jensen-Butler (2004). The data used
in the model, together with the interregional SAM, are described in Madsen & Jensen-Butler
(2005) and Madsen et al (2001b).
LINE is based upon two interrelated circles: a real Keynesian circuit and a dual cost-price
circuit. Figure 4 shows the general model structure, based upon the real circle employed in
LINE.
The horizontal dimension is spatial: place of production (P), place of residence (R) and
place of commodity market (S). Production activity is related to place of production. Factor
rewards and income to institutions are related to place of residence and demand for
commodities is assigned to place of commodity market. The vertical dimension follows with
its three-fold division the general structure of a SAM model. Production is related to activities
(J); factor incomes are related to factors of production with labour by sex, age and education
(G) and type of households (H) commodities are related to the supply and demand for
commodities (I).
The real circuit corresponds to a straightforward Keynesian model and moves clockwise in
figure 4. Starting in the upper left corner (PJ), production generates factor incomes in basic
prices, including the part of income used to pay commuting costs. This factor income is
transformed from sectors (J) to sex, age and educational groups and households (H) and from
place of production (P) to place of residence (R) through a commuting model. Employment
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