prolog.gms : Market Equilibrium and Activity Analysis

**Description**

A nonlinear programming model is used to find the market equilibrium for a model with activity analysis containing multiple production technologies. The calibration or reconciliation calculations are not shown in this version. In practice it may be necessary to solve another nlp in order to find a consistent initial point. Also, the shadow prices on commodity balances and resource constraints are not always as reported in the reference. only if some variables (and equations) are substituted out and all constraints are set to =e= will the reported relationship hold.

**Reference**

- Norton, R D, and Scandizzo, P L, Market Equilibrium Computations in Activity Analysis Models. Operations Research 29, 2 (1981).

**Small Model of Type :** NLP

**Category :** GAMS Model library

**Main file :** prolog.gms

```
$Title Market Equilibrium and Activity Analysis (PROLOG,SEQ=41)
$Ontext
A nonlinear programming model is used to find the market
equilibrium for a model with activity analysis containing
multiple production technologies. The calibration or reconciliation
calculations are not shown in this version. In practice it may
be necessary to solve another nlp in order to find a consistent
initial point. Also, the shadow prices on commodity balances
and resource constraints are not always as reported in the reference.
only if some variables (and equations) are substituted out and
all constraints are set to =e= will the reported relationship hold.
Norton, R D, and Scandizzo, P L, Market Equilibrium Computations in
Activity Analysis Models. Operations Research 29, 2 (1981).
$Offtext
Sets i commodities / food, h-industry, l-industry /
g(i) goods demanded / food, l-industry /
k resources / labor, capital /
h households / workers, enterpr /
t technologies / tech-1, tech-2, tech-3 /
Alias (i,j), (g,gp) ;
Table a(i,j) input-output matrix
food h-industry l-industry
food .060 .244
h-industry .064 .420 .172
l-industry .048 .247 .084
Table d(i,k,t) resource technology matrix
labor.tech-1 capital.tech-1 labor.tech-2 capital.tech-2 labor.tech-3 capital.tech-3
food 1.0 2.0 1.2 1.8 .8 2.2
h-industry 2.0 3.0 1.8 3.5 2.4 2.3
l-industry 3.0 3.0 2.7 3.2 3.2 2.7
Table bb(h,k) resource endowment and ownership
labor capital
workers .900 .100
enterpr .100 .900
Table x0(i,h) initial consumption
workers enterpr
food 352.0 430.0
l-industry 222.0 292.0
Parameters b(k) total resource endowment / labor = 3712, capital = 5000 /
p0(i) initial prices / food = .5942, h-industry = 1.6167, l-industry = 1.31077 /
y0(h) initial income
q0(i) initial production
r0 initial marginal product ;
y0(h) = sum(g, x0(g,h)*p0(g));
r0 = sum(h, y0(h))/sum(k, b(k)); display y0, r0;
$Stitle calibration of demand system and aggregation tests
Parameters gamma(g,h) les parameter
beta(g,h) les parameter
alpha(g,h) budget shares
al(g,h) linear demand intercept
cl(g,h) income demand slope
s(g,gp,h) cross price demand slope
an(g,h) nonlinear demand constant
eta(g,gp,h) price elasticities
Table epsi(i,h) income elasticities
workers enterpr
food .8 .6
l-industry 1.14 1.26
Scalar omega money flexibility - frish / -2 / ;
alpha(g,h) = p0(g)*x0(g,h)/y0(h);
epsi(g,h) = epsi(g,h)/sum(gp, epsi(gp,h)*alpha(gp,h));
beta(g,h) = epsi(g,h)*alpha(g,h);
gamma(g,h) = x0(g,h) + beta(g,h)*y0(h)/p0(g)/omega;
eta(g,gp,h) = -gamma(gp,h)*p0(gp)*beta(g,h)/p0(g)/x0(g,h);
eta(g,g ,h) = gamma(g ,h)*(1-beta(g,h))/x0(g,h) - 1;
Display alpha, epsi, beta, gamma, eta;
an(g,h) = x0(g,h)/prod(gp, p0(gp)**eta(g,gp,h))/y0(h)**epsi(g,h);
cl(g,h) = epsi(g,h)*x0(g,h)/y0(h);
s(g,gp,h) = eta(g,gp,h)*x0(g,h)/p0(gp);
al(g,h) = x0(g,h) - sum(gp, s(g,gp,h)*p0(gp)) - cl(g,h)*y0(h);
Display an, cl, s, al;
Parameters etest(h) engel aggregation test
htest(g,h) homogeneity test
ctest(g,h) cournot aggregation test ;
etest(h) = sum(g, epsi(g,h)*alpha(g,h)) -1 ;
htest(g,h) = sum(gp, eta(g,gp,h)) + epsi(g,h) ;
ctest(g,h) = sum(gp, alpha(gp,h)*eta(gp,g,h)) + alpha(g,h) ;
Display etest, htest, ctest;
$Stitle model definitions
Variables z expenditure minus factor income
p(i) prices of goods
x(i,h) quantities consumed
r(k) marginal product
q(i,t) quantities produced
y(h) income
Positive variables x, q, p, r, y;
Equations cb(i) commodity balances
rc(k) resource constraint
de(g,h) demand - linear expenditure system
dl(g,h) demand - linear demand function
dn(g,h) demand - nonlinear demand function
bc(h) budget constraint
id(h) income definition
mp(i,t) marginal pricing condition
zdef objective definition ;
cb(i).. sum(h$g(i), x(i,h)) =l= sum(t, q(i,t) - sum(j, a(i,j)*q(j,t)));
rc(k).. sum((i,t), d(i,k,t)*q(i,t)) =l= b(k);
de(g,h).. x(g,h) =l= gamma(g,h) + beta(g,h)*( y(h) - sum(gp, gamma(gp,h)*p(gp)) )/p(g);
dl(g,h).. x(g,h) =l= al(g,h) + sum(gp, s(g,gp,h)*p(gp)) + cl(g,h)*y(h);
dn(g,h).. x(g,h) =l= an(g,h)*prod(gp, p(gp)**eta(g,gp,h))*y(h)**epsi(g,h);
bc(h).. sum(g, x(g,h)*p(g)) =l= y(h);
id(h).. y(h) =l= sum(k, bb(h,k)*b(k)*r(k));
mp(i,t).. p(i) =l= sum(j, a(j,i)*p(j)) + sum(k, d(i,k,t)*r(k));
zdef.. z =e= sum((g,h), x(g,h)*p(g)) - sum(k, b(k)*r(k));
Model nortone eles version / cb, rc, de, bc, id, mp, zdef /
nortonl linear version / cb, rc, dl, bc, id, mp, zdef /
nortonn nonlinear version / cb, rc, dn, bc, id, mp, zdef / ;
x.l(i,h) = x0(i,h); p.l(i) = p0(i); y.l(h) = y0(h); r.l(k) = r0;
* lower bounds are placed on price to avoid the trivial solution p=0.
p.lo(i) = .2;
Parameters wp(g) weights for price index
pi price index
yp real income;
wp(g) = sum(h, x0(g,h)*p0(g))/sum(h, y0(h)); display wp;
Solve nortonl maximizing z using nlp;
pi("linear") = sum(g, wp(g)*p.l(g))/sum(g, wp(g)*p0(g));
yp("linear") = sum(h, y.l(h))/pi("linear");
Display pi, yp;
Solve nortone maximizing z using nlp;
pi("les") = sum(g, wp(g)*p.l(g))/sum(g, wp(g)*p0(g));
yp("les") = sum(h, y.l(h))/pi("les");
Display pi, yp;
Solve nortonn maximizing z using nlp;
pi("nonlin") = sum(g, wp(g)*p.l(g))/sum(g, wp(g)*p0(g));
yp("nonlin") = sum(h, y.l(h))/pi("nonlin");
Display pi, yp;
```