An introduction to CGE-modelling and an illustrative application to Eastern European Integration with the EU

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Abstract

This paper gives an introduction to the Computable General Equilibrium (CGE) modelling, and presents an application of the technique to the analysis of the Europe Agreements between the EU and Hungary, Poland and the former Czechoslovakia. The main purpose of the paper is to illustrate the method, rather than present a state-of-the-art analysis. The CGE-approach makes it possible to pursue the analysis further than possible with analytical methods, and it can yield qualitative as well as quantitative results. A model is presented, and it is used to analyse the consequences of the Europe Agreements as well as the sensitivity of the results to important assumptions. The analysis shows only moderate long run gains for the Eastern Europe countries (around 1-2% of GDP per year), and very small gains for the EU countries. The sensitivity analysis shows that the results are relatively robust to the way the model is calibrated.