Regional household (GTAP)

Definition

Regional household:

• receive all income generated in a given economy
  • payment to primary factor
  • quota rent
  • net tax

It has the utility function with:

• composite of private consumption up
• composite of government consumption ug
• saving (qsave), saving as a proxy of future consumption

In GTAP, we model the utility function as a Cobb-Douglas function with substitution elasticity σ = 1

• Private expenditure per capita UP
• Government expenditure UG / POP
• Saving QSAVE / POP

The implication of having Cobb-Douglas functional form of regional household's utility: when economic grows, the budget share of government, saving and private household remains fixed.

This model setting is more reasonable compared with modeling government budget with an exogenous value, which results in the changing of government's budget share (share in regional budget) with total income increase or decrease.

Level form

Linearized form

Advantage of measuring income through regional household:

• regional income can be used to calculate equivalent variation, as a measure of welfare
• No need for domestic accounts for direct tax and transfer

Disadvantages

• No tracking of individual tax or subsidies
• No link between government expenditure and tax revenue
  • In this setting, the tax revenue goes to the regional household instead of the government.
• No explicit government budget of constraint
  • The government budget is from C-D function of the top layer, not the exact flow of tax from tax payers (household, firm, trade, etc)
• The disadvantage of no detailed public sector (government) in GTAP is due to the fact that the necessary data of public sector is not readily available from international sources.
  • This limitation can be relaxed if additional data on public sectors are available.

Note

Example