Modeling Economic Transition: A Two-Tier Price Computable General Equilibrium Model of the Chinese Economy

Abstract

This paper presents a computable general equilibrium model with a two-tier price system incorporated. The model allows for analyzing reform policies in relation to plan prices and quantities. It captures the income effects generated from divergence between market and plan prices. The model is capable of simulating the reform process of transitional economies like China. A simulation of 50 percent rise in the plan price of crude petroleum, a highly controlled commodity in China, is provided as an illustrative example to show the complexity of market responses in a transitional economy.