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A Economic-Environmental Model of China Jing Cao, Mun S. Ho, and Dale W. Jorgenson In this appendix we describe the model for China in some detail, beginning with the modeling of each of the main economic agents. Then in section A.2 we describe the data and parameters underlying the model. A previous version of this model of the Chinese economy is used in Ho and Nielsen (2007), and here we describe the updates to it. This is a multisector model of economic growth where the main drivers of growth are population, total factor productivity growth, and changes in the quality of labor and capital. It has a dynamic recursive structure—that is, a structure in which investment is determined by fixed savings rate as in the Solow model. A.1 Structure of the Model We discuss the five main actors in the economy in turn—producers, households, capital owners, government, and foreigners. For easy reference, table A.1 lists variables that are referred to with some frequency. In general, a bar above a symbol indicates that it is a plan parameter or variable, while a tilde indicates a market variable. Symbols without markings are total quantities or average prices. To reduce unnecessary notation, we drop the time subscript t from our equations whenever possible. A.1.1 Production Each of the 33 industries is assumed to produce its output using a constant-returnsto -scale technology. For each sector j the output at time t, QIjt, is expressed as QI f KD LD TD A A t j j j j j nj = ( , , , , , , ) 1 … (A.1) where KDj, LDj, TDj, and Aij are capital, labor, land, and intermediate inputs, respectively.1 In sectors for which both plan and market allocation exists, output is 376 Appendix A Table A.1 Selected parameters and variables in the economic model Parameters si e Export subsidy rate on good i ti c Carbon tax rate on good i tk Tax rate on capital income tL Tax rate on labor income ti r Net import tariff rate on good i ti t Net indirect tax (output tax less subsidy) rate on good i tx Unit tax per ton of carbon Endogenous Variables G_I Interest on government bonds paid to households G_INV Investment through the government budget G_IR Interest on government bonds paid to the rest of the world G_transfer Government transfer payments to households Pi KD Rental price of market capital by sector PEi * Export price in foreign currency for good i PIi Producer price of good i PIi t Purchaser price of good i including taxes PL Average wage PLi Wage in sector i PMi Import price in domestic currency for good i PMi * Import price in foreign currency for good i PSi Supply price of good i PTi Rental price of land of type i QIi Total output for sector i QSi Total supply for sector i r(B*) Payments by enterprises to the rest of the world R_transfer Transfers to households from the rest of the world made up of two components, the plan quota output (QIj) and the output sold on the market (QIj  ). The plan quota output is sold at the state-set price ( PIj ) while the output in excess of the quota is sold at the market price (PIj  ). The PI and QI names are chosen to reflect that these are domestic industry variables, as opposed to commodities (PC) or total supply (PS), the sum of domestic output and imports. A more detailed discussion of how this plan-market formulation is different from standard market economy models is given in Garbaccio, Ho, and Jorgenson (1999). Economic-Environmental Model of China 377 In summary, if the constraints are not binding, then the “two-tier plan/market” economy operates at the margin as a market economy with lump sum transfers between agents. The capital stock in each industry consists of two parts—the fixed capital, Kj, that is inherited from the initial period, and the market portion, KDj , that is rented at the market rate. The before-tax return to the owners of fixed capital in sector j is profit PI QI PI QI P KD PL LD PT TD PS A P j j j j j j KD j j j j j i ij i = + − − − − − ∑     S S A i ij i   ∑ (A.2) For each industry, given the capital stock Kj and prices, the first-order conditions from maximizing equation (A.2), subject to equation (A.1...


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