A social accounting matrix (SAM) is an economywide consistent representation of the payments in an economy, linking production, primary factors, and institutions (typically, households, government, and the rest of the world). In the words of Round (2003), “it is a comprehensive, flexible, and disaggregated framework which elaborates and articulates the generation of income by activities of production and the distribution and redistribution of income between social and institutional groups.” Typically, a SAM refers to the economy of a country for one year. It may be used to describe the structure of an economy and as a data input to economic models, most importantly CGE models such as GEM-Care (see below). The fact that they are consistent assures that they do not contain contradictory pieces of information. Most features of a SAM for GEM-Care are familiar from SAMs used for other models. A CGE model is a representation of a real economy that is solved numerically and covers the whole economy, almost invariably split into multiple sectors. The first CGE model, applied to Norway, was developed in the late 1950s (Johansen 1960). Since the late 1970s, the field of CGE modeling has expanded rapidly. At this point, multiple models and databases have been developed for virtually every country. Mathematically, a CGE model is a system of simultaneous non-linear equations; the key data source is a social accounting matrix (SAM). The equilibrium aspect of the model refers to the fact that, under each solution, agents are assumed to have reached “optimal” decisions; this typically means that, subject to budget constraints, producers and consumers maximize profits and utility, respectively, while government decisions respect a set of rules (for example, to tax based on policy-determined rates and to adjust domestic financing to respect its budget constraint). Similarly, the economy lives under a budget constraint in its dealings with the rest of the world (represented by the balance of payments). In markets for products and factors, the quantities supplied and demanded (including stock changes) must be equal; accordingly, it is not possible to use a product that is without an explicit supply source and, if something is supplied, it must end up in some destination that also is identified. Prices play a key role, clearing most markets in the context of government policy interventions and international trade; however, models may be designed to mimic other clearing mechanisms whenever they are relevant. For labor, unemployment may be modeled explicitly, permitting unemployment and employment levels to vary according to changes in economic conditions. 

Policy Areas Addressed by CGE Models 

The models provide a laboratory for simulations of the impact of alternative policies and other shocks (or combinations of shocks) at a minimal cost. Real-world experiments are not possible at the macro level, do not consider second-round effects, and considerably more costly (in relevant micro applications). CGE models have been used to analyze a wide range of issues, often selected in response to the policy concerns of national governments and international institutions. Detailed aspects of model structure and disaggregation determine what kinds of issues a model can address; i.e., when some specific issues have been singled out for analysis, it is important to develop (design and/or adjust) model and database. Over the years, policy areas that often have been addressed include international trade (trade policies and world price shocks); fiscal issues (esp. taxation); poverty and income distribution; sector policies; labor markets; and issues related to natural resources, energy, and the environment. In general, CGE models are appropriate for medium- to long-run analyses of shocks that have significant repercussions beyond the sector or household that is affected most directly (and often end up being affected indirectly, via feedbacks). In this context, one important feature of CGE models is their ability to capture links between different parts of an economy (for example, links between production sectors via intermediate demands, and links between household incomes from production and household demands with a feedback impact on production). On the other hand, CGE models are typically not appropriate for the analysis of many issues that are at the center of macroeconomics, including short-run responses to economic shocks (as the equilibrium assumptions of CGE models tend to be violated) and issues related to the financial sector (as it is treated in a very simple manner).