Frame-Shifting in Regional General Equilibrium Models

In CGE (Computable General Equilibrium) models, input-output coefficients are balanced row-wise through a supply-demand interaction for a physical commodity. Input-output columns consist of physical flows that require a unique set of prices to balance income and sales of intermediate goods and services. Another type of model, developed originally by Conway (1990, 1991) and further developed by Israilevich et al. (1997), termed the Regional Econometric Input-Output Model [REIM] approach, balances the input-output table rows in value terms. This approach has no physical flows of inputs nor does it have prices. It utilizes Marshallian (see Takayama, 1985) output equilibrium that requires no explicit price values. Since REIM has no prices, it is impossible to impose column-wise constraints. As a result, value-added rows can be considered a residual that creates a potential problem in that the value added may be too small, or even negative, as a result of simulation exercises, impact analyses or forecasts.