From Accounting to Behaviour
MODEL LAB · LABORATORY 10
From Accounting
to Behaviour.
Transform a balanced benchmark into a behavioural economy. Introduce optimizing agents, relative prices, substitution and market clearing—the mechanisms that allow a CGE model to explain adjustment rather than merely record transactions.
ProducersMarketsHouseholdsGovernment
THE MODELLING TRANSITION
Accounts constrain.
Behaviour explains.
A SAM supplies the benchmark quantities and incomes. Behavioural equations determine how agents respond when policy changes prices, resources and incentives.
True by construction
Y ≡ C + I + G + X − M
The identity must hold in every benchmark and counterfactual equilibrium. It does not explain any choice.
Assumed and parameterised
Cᵢ = Cᵢ(p, Y, β)
Consumption depends on prices, income and preference parameters. Its form and elasticity require justification.
THE BEHAVIOURAL CORE
Agents choose.
Markets reconcile.
Production
Q = γ[δKᵖ+(1−δ)Lᵖ]¹ᐟᵖ
Firms minimize cost subject to technology and substitute among factors according to σ.
Households
max U(C) s.t. p·C ≤ Y
Households allocate disposable income across consumption goods and saving.
Trade
Q = CES(D,M)
Armington substitution distinguishes domestic and imported varieties by origin.
Market clearing
Supplyᵢ = Demandᵢ
Prices adjust until commodity and factor markets satisfy the selected equilibrium conditions.
CGE ADJUSTMENT LAB
Change costs.
Observe adaptation.
Apply an input-cost shock and vary substitution elasticity. The conceptual engine compares a rigid economy with one able to reorganize its input mix.
BEHAVIOURAL READINGThe cost shock raises output prices, reduces demand and induces firms to substitute away from the affected input. The response depends materially on σ.
CLOSURE IS ECONOMIC THEORY
What adjusts?
What remains fixed?
Labour market
Choose whether employment, wages or both adjust, and whether labour is mobile across sectors.
Capital market
Specify whether capital is fixed, sector-specific or mobile over the simulation horizon.
Government balance
Determine whether taxes, spending, saving or borrowing absorbs the fiscal change.
External balance
Select whether the exchange rate, foreign saving or another variable restores external consistency.
SCIENTIFIC CHECKPOINT
Why is an accounting identity
not a behavioural theory?
Which statement is correct?
Separate definitional consistency from explanatory mechanisms.
