3.2
Interpretation and Closure
In our comparative-static CGE model simulation, the results generated represent percentage
changes in the different variables1. As an example, the interpretation of the change in
employment, due to the introduction of a tariff, is illustrated in Figure 1.1.
Figure 1.1 Comparative-static interpretation of results
Employment
C ■ *T
/
/
Change
B- .1
A
----------------------------------------1---- years
0T
Source: Horrdige (2000)
Figure 1.1 illustrates the change in the level of employment over time. In the base year the
level of employment is given as A. If no tariff is introduced the level of employment will
change over time to B. Therefore in year T, the level of employment is given as B. With the
introduction of a tariff, ceteris paribus, the level of employment in period T would reach C.
What the CGE model actually calculates is the percentage change in the employment level, in
period T, i.e. the distance BC (Horridge, 2000).
The closure refers to a set of assumptions that are used to explain a specific simulation at a
given time. The type of closure depends on the choice of exogenous variables, making the
model very flexible in that regard. In a typical short run closure, as illustrated by Figure 1.2,
the real wage, technology, capital stock, private consumption, investment, and government
consumption are exogenous and set by the user. Only these exogenous variables may be
shocked. It is also important to realise that the percentage change in all exogenous variables
not directly shocked will be zero. The numeraire in this simulation is the nominal exchange
rate, phi, and is also kept exogenous.
Based on Figure 1.1, the percentage change is given as [(C-B)/B]*100.
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