How the CGE Model Estimates the Total Impacts of a Natural Disaster

Homework: CGE Analysis
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a Explain how the CGE model estimates the total impacts of a natural disaster or terrorist attack in general.
In the study by Rose and Liao (2005) the researchers used a computable general equilibrium CGE model to evaluate the impact of natural disasters (earthquake) on regional water disruption. The CGE models integrated the demand and supply function to assess the equilibrium allocation of the price of water, while also considering substitution when determining productivity. As the CGE is flexible compared to the I-O model the authors choose this option to determine the long-term impacts of the natural disaster. The CGE approach was appropriate as the study sought to integrate input and import substitutions in the analysis to assess the impact of the disruptions to the regional economy.
The CGE model employed in the study distinguished between the direct and indirect impact of water service disruption in the regional economy. The approach provides a clearer picture of the impacts compared to the CGE approaches that merely highlight the total impacts alone. In the study, they identified the indirect impacts by first determining the sectoral production functions from the model, followed by estimation of the empirical direct loss (Rose & Liao, 2005). Subsequently, the recalibrated sectoral production functions were inserted into the model to determine the total regional losses, while the direct losses were subtracted from the total losses to compute the indirect losses (Rose & Liao, 2005).
The paper further integrates production in the CGE analysis where there is substitution of the production function in the different sectors...