Worldscan

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WorldScan(WORLD model for Scenario Analysis) is a multi-region, multi-sector, applied general equilibrium model, which focuses on long-term growth and trade in the world economy. The model is based on the neoclassical theories of growth and trade.

Because the emission of CO2, the most important greenhouse gas, is directly related to the use of fossil fuels (coal, oil and gas), energy is one of the main linkages between the economy and the environment / climate. The energy version of WorldScan is an extension of the core version with a detailed modelling of the energy sector. It is designed to analyze climate change policies, particularly CO2-abatement policies. Recently, the energy version of the model is extended by the inclusion of non CO2 emissions.

WorldScan distinguishes a flexible amount of regions and sectors. For energy issues at a global level the model discriminates 12 world regions, and 11 sectors, including 4 for energy-supply (coal, oil, gas and electricity) which allows for substitution between different energy carriers. The distinction among industrialized countries, countries in transition (Annex B) and less industrialized countries (non-Annex B) is particularly relevant for the analysis of climate change policy. For trade issues the model distinguishes more industrial and service sectors and an aggregated energy sector. For European policy issues the model distinguishes often 16 regions (9 EU regions, and 7 other rest OECD and non-OECD regions). The classifications of the sectors is flexible depending on the policy issue.

Result

Typical Model Applications:

• Wage, employment or production effects in different parts of the world.
• Analysis of different scenarios for implementing the Kyoto Protocol, and post Kyoto policy issues.
• Emphasis was on the link between OECD and non-OECD countries nowadays it is often on the spillover effects between EU countries.
• EU enlargement issues: such as the 1n new accession countries, and Turkey.
• Scenario analysis, the model is able to develop scenarios until 2100.

Sectors:

Materials, Agriculture and foodstuffs, Energy-intensive goods, Consumption goods, Capital goods and durables, Domestic services, International services and transport, Other raw materials

Energy Carriers:

• Coal
• Oil and petroleum products
• Natural gas
• Electricity

Also here every sectoral classification is possible as long as it fits into the GTAP database. For many issues the following sectors are covered: Agriculture, Energy, Other Raw materials, Food processing, Textiles, Chemicals, Basic Metals, Electronic equipment, Other Machinery and equipment, Other manufacturing, Trade services, Construction, Transport services, Communication, Other business services, Rest services.

Assumptions:

WorldScan contains four characteristic elements to describe long-term developments:

1. The Armington trade specification, which includes elasticities describing the preference for consumption of domestically over internationally produced goods. WorldScan assumes a low short-term and higher long-term Armington elasticity, emphasizing the Law-of-one price in the long run.

2. A low-productivity sector in less-industrialized countries. During the process of economic development labour is reallocated from the traditional low-productivity sector to the modern, high productivity sectors.

3. Consumption patterns are not constant in time. The consumption patterns in less-industrialized regions converge towards those in leading regions. As income per capita rises, consumers spend relatively more on services and less on food.

4. Low and high-skilled labour. This distinction allows for a better description of specialization patterns. OECD countries with much high-skilled labour specialize in the production of skill-intensive goods, while non-OECD countries relatively abundant in low-skilled labour specialize in skill-extensive goods.

5. Technological progress is affected by R&D spillovers. Spillovers from R&D of the own sector, other national sectors, and sectors abroad, affect TFP positively.

Behavioural assumptions:

Consumers maximize their lifetime utility, a factor dependent on their consumption in both current and future periods. A consumer's budget consists of accumulated financial and human wealth, defined as the discounted value of future income flows. Besides income from labour these flows include government transfers and surplus profits (which originate from monopoly power). Given total consumption, consumers allocate their expenditures on various goods on the basis of their preferences. Consumer preferences will converge towards those in leading regions along with the increasing per capita consumption. Total demand for a good within a country is the aggregate of consumer demand, intermediary demand and investment demand. Goods can be bought within or outside the region considered. The demand for a specific variety of a good in a certain region depends on the preferences for that variety, its price compared to the average price of the other varieties and total demand for that good.

Firms maximize their profits on the basis of total demand and by minimizing the costs of the required inputs. These inputs include capital, which is bought in the current period, and other inputs, purchased in the next period. Capital consists of capital goods and construction activities (included in the services sector). Other inputs include low- and high-skilled labour, and all intermediary inputs. Producers derive investment demand as the difference between the volume of the capital stock required minus the depreciated volume of the capital stock from the previous period. Because each region produces its own unique variety of a good, these varieties are imperfect substitutes. The market structure reflects imperfect competition. Producers derive their prices on the basis of profit maximization. The producer price is the unit cost price times a mark-up, which is dependent on the degree of substitutability on each market. The consumer prices are equal to the producer prices within a region. For trade, the consumer price is the producer price from the exporting region plus import and export taxes, and transport.

Supply of high- and low-skilled workers is exogenous. In OECD regions, exogenous natural unemployment rates are assumed for both skill levels. For non-OECD regions unemployment rates for high-skilled workers are exogenous; those for low-skilled workers are endogenous and much higher than in OECD regions, because low-skilled workers have no access to the formal labour market and work in the low-productivity sector. The allocation of low-skilled workers between low- and high-productivity sectors depends on the ratio of low-skilled wages in the formal sector and per capita income in the low-productivity sectors.

The description of the informal (low-productivity) sector in less-industrialized countries is based on Lewis (1954). The low-productivity sector is a traditional subsistence sector with a marginal productivity of workers of (close to) zero lacking access to capital and modern technologies. The high-productivity sectors grow through the accumulation of capital and technical progress; as regions develop, labour moves from the low- to the high-productivity sectors.

Investments by capital owners in the various regions are allocated on the basis of the regional returns on investments and the preferences for investment in certain regions. In each region the supply of capital matches the demand and is based on interest rates. Equilibrium between global investments and global savings implies global outlays to equal global income. The relative output prices ensure equilibrium of every single product market.

Firms spend some of their resources on R&D. The increasing R&D stock affects TFP growth by the R&D spillovers. R&D spillovers of the own sector, other domestic sector and foreign sectors affects TFP growth positively.

Main Model Results:

WorldScan is developed for (long term) scenario analysis.

• Regional gross domestic product (GDP)
• Welfare effects
• Value added for industry, services and agriculture sectors
• Foreign trade
• Forecast of energy demand / emissions.

WorldScan is also modelled for policy analysis

• Trade policy issues such as WTO membership of China.
• EU enlargement issues
• Climate-change issues.

Time Horizon

1995 up to 2100

Required technical infrastructure:

The model runs on a PC. It is modelled in ISIS. That software is developed by CPB and the University of Aarhus.

Data Sources:

WorldScan uses demand, production, trade patterns, labour and capital intensity of the various sectors, and volumes and prices of energy from the GTAP5 data. The calibration year is 1997. Begin 2005, the GTAP6 data base will be used. The calibration year is 2001.

Model Extensions:

An energy version of the model.

An R&D version of the model.

Links to other Models, Projects, Networks:

- IMAGE (Worldscan is the world economy modelling component of the IMAGE modelling system.)

- Member of the GTAP consortium.

Regional Scope:

WORLDSCAN distinguishes 12 world regions:

United States, Western Europe, Japan, Rest of OECD, Eastern Europe, Former Soviet Union, China, Dynamic Asian Economies, India and Rest of the World, Middle East and North Africa, Subsaharan Africa, Latin America.

The European version of the models consists of Germany, United Kingdom, France, Spain, Italy, Netherlands, Belgium, Rest old EU, acc10, Former Sovjet Union, Turkey, United States, Latin America, Rest OECD, Asia and Africa.

However, every other regional classification is possible, as long as the relevant regions and countries are covered by the GTAP database.

See also

• IA TOOLS
• CPB Netherlands Buerau for Economic Policy Analysis

References

CPB (1999) Worldscan - the core model. CPB Netherlands Bureau for Economic Policy Analysis, December 1999. ISBN 90 5833 020 6.

In 2005 CPB will present a new special publication on the model, CPB (1999) is outdated.