Bandara: An Investigation of "Dutch Disease" economics with a miniature CGE model

Bandara, Jayatilleke S. (1991). "An investigation of "Dutch disease" economics with a miniature CGE model". Journal of Policy Modeling, 13(1), 67-92. http://www.sciencedirect.com/science/article/B6V82-45GSHRK-1D/1/62f530612e9dbc43d0d329ee3ec9a51f

Coren has examined Dutch Disease effects using a three sector model that has subsequently been referred to as the “core model”. This article uses a similar three-sector model CGE model. It concludes that the CGE is good for exploring Dutch Disease effects on economies.

The three sectors of the “core-model” are the, “’booming’ sector, which could be the oil sector or any other primary exporting sector during a period of increasing prices…the other tradables, or the ‘lagging’ sector…and…the nontradables sector, which includes services, utilities, transportation, and so on” (68). According to this model, there are three reasons for the Dutch Disease: “…an improvement in the technology of the booming sector…an increase in foreign capital inflows…an increase in the price of the export commodity” (68).

“The simplest miniature CGE model within which the static effects of the Dutch disease can be analyzed is one that distinguishes three sectors, two producing tradables, namely, import-competing goods (good 1) and exports (good 3), and the other producing nontradeables (good 2). There are three types of industry-specific capital and an intersectorally mobile factor, labor. There ar3e no intermediate inputs. The model has two categories of final users…the households consume the import-competing good and the nontradeable; domestic consumption of the import-competing good includes both domestic output and imports. These features are shown in the input-output table” (69). There is full employment. Monetary issues are not taken into consideration.

There are five different types of equations in this model: “equations describing households demands…equations describing industry demand for primary factors…pricing equations setting zero-pure profits…market-clearing equations for commodities and primary factors…equations describing the balance of payments, the consumer price index, aggregate employment and real income” (71).