Comparison of I-O and CGE models by Simulating the Impact of Price Liberalization of Electricity, Distribution of Natural Gas and Water on the Output and Prices of the Main Sectors of Iran Economy

Authors
farid fAYAZMANESH
Ali Ranjbaraki
Institute of Humanities and Social Studies
Abstract
Although, input-output (I-O) and general equilibrium (CGE) models are systems based on interrelations between sectors and economic agents. However, they are very different in terms of design complexity, model solving techniques, required input data, outcomes, theorical structure and adopted assumptions.

Therefore, the results of simulating the effects of an economic policy using each of these models will definitely be different. But, avoiding complexity, difficult solving techniques, collecting large amount of data and so on, sometimes make us to use simpler, although less accurate, models. In this case, obviously, the assumptions and restrictions of the model are to be fully noticed, when interpreting the outcomes of simulation. Otherwise, incorrect decision making will be inevitable.In this paper, we assess the impact of price liberalization of electricity, distribution of natural Gas and water on the output and prices of the main sectors of Iran economy. This is done by using a I-O and a CGE, both designed by autors. The simulation is implemented by cutting subsidy payed to final and intermediate consumption of electricity, distribution of natural Gas and water. The outcomes are largely different regarding the amount and the direction of sectoral output and price changes. While the outcomes of I-O model are against this policy, the results of CGE model, in which total output and household consumption increase, are in favor of it. The rise of demand in tradeable agriculture and industries and mining are accompanied with more import, so that their new equilibrium output will be lesser. But, output of non-tradeable construction and low tradeable services increase. The increase of crude oil and natural gas are totaly exported.
Keywords
Input-output Model
General Equilibrium Model
Price Liberalization
Subsidy
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