Abstract
This paper demonstrates how simple general equilibrium models can be solved with the help of Microsoft Excel. Two different general equilibrium models for tax incidence analysis are used as illustrative examples. The methods presented here are intended to be beneficial to both students and teachers working with general equilibrium theory in the classroom and can easily be extended to various policy analysis term projects. The techniques presented here are simple and effective tools for inclusion in any student's toolkit.
Highlights
The history of general equilibrium (GE) theory can be traced back more than 100 years to the work of Leon Walras (1874)
3 http://wilcoxen.cp.maxwell.syr.edu/pages/371.html 4Although, this framework can be extended to more complicated examples of computable general equilibrium models, such as the examples given in Kehoe and Kehoe (1994)
In the past, teaching general equilibrium theory often focussed on a more abstract approach based on difficult mathematical equations and reasoning
Summary
The CES technology model corresponds to the original Arrow-Debreu model, elaborated on in Arrow and Hahn (1971) and introduced as an applied study by Shoven and Whalley in their publication "Applied General - Equilibrium Models of Taxation and International. In order to solve the model including the tax policy parameters, I add a new solution variable T to the minimization problem and an additional constraint that T is equal to the total revenue specified above. The capital tax has increased the income of the poor household, the total effect on welfare is a loss This is due to the fact that this tax policy cannot raise enough tax revenue to distribute to the poor at the same time, it has lowered total production of manufactured goods in the economy, which in turn, substantially affects income and the utility of the rich. If we change the endowment of capital and labor for the poor and the rich, or the elasticity of substitution of the two products, the corresponding equilibrium solution will change and will result in different welfare values. If we allow students to engage in constructing and experimenting with the model, instead of lecturing based on mathematical equations, it will enhance their analytical abilities especially as it relates what they have learned to a more practical setting
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