Modelling Transport in an Interregional General Equilibrium Model with Externalities

follows the same path. Employment and unemployment are determined at place of residence
(R). In addition to other adjustments, taxes are deducted from factor income and transfers
added, giving disposable income, which by definition is related to place of residence (RH).

Disposable income is the basis for determination of private consumption in market prices,
by place of residence (RH). Private consumption is divided into tourism (domestic and
international) and local private consumption and assigned to place of commodity market (SI)
using a shopping model for local private consumption and a travel model for domestic
tourism. Private consumption, together with intermediate consumption, public consumption
and investments constitute the total local demand for commodities in market prices (SI). The
market price variables are transformed into basic prices through a use matrix, including
information on the commodity composition of demand and commodity tax rates and trade
margin shares. In this transformation from market prices to basic prices commodity taxes and
trade margins are subtracted. Local demand is met by imports from other regions and abroad
in addition to local production (SI). Through a trade model exports to other regions and
production for the region itself is determined (PI). Adding export abroad, gross output by
commodity is determined (PI). Through a reverse make matrix the cycle returns to production
by sector (PJ).

Economic activity in the real circle is affected by changes in prices and wages: wages and
productivity affect prices of the local production (PJ), which through relative changes in local
competitiveness affects exports (PI) and imports (SI) which in turn affects private
consumption through changes in real disposable income (RH). The anticlockwise cost/price
circuit shown in figure 5 corresponds to this dual problem. In the cost-price circle, production
and demand are calculated in current prices, which in turn are transformed into relevant price
indices. In the upper left corner production in current prices (in basic prices) is determined by
costs (intermediate consumption, value added and indirect taxes, net in relation to production
- PJ). Through a make matrix, sector prices by sector are transformed into sector prices by
commodity (PI). These are then transformed from place of production to place of demand (SI)
and further into market prices through inclusion of retailing and wholesaling costs and
indirect taxes. This transformation takes place using a reverse use matrix. Commodities for
intermediate consumption enter into the next step in the production chain, determining prices
of production and these prices are spread further in a round-by-round distribution process.
Finally, private consumption is transformed from place of commodity market (SI) to place of
residence in market prices (RI).

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