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Measuring The Long-Term Regional Economic Impacts of High-Speed Rail in China Using a Dynami

Specifically, the model assumes that each economic sector produces one commodity each,
maximizing profits through a nested production structure with both intermediate goods and
primary factors through a Leontief function at the top nest, as illustrated in Figure 2. On
the right-hand side, primary goods are produced from three types of factor inputs, including
land, capital and labor, the latter one of which is derived from a third-level CES nesting called
skill nest, representing a substitution of different types of labors. On the left-hand side,
the intermediate goods are produced through various goods under a Constant Elasticity of
Substitution (CES) production function, each commodity is further derived from a composite
with both domestically produced good and imported good through a third-level CES function
(also known as Armington nest). In the fourth-level nest, a domestically produced commodity
can be decomposed by different origins of production through a CES function, which essentially
reflects inter-regional trade interactions. In the fifth-level, various margin costs are then added
to any specific commodity through a Leontief production function. In the sixth-level, the source
of each margin is aggregated through a CES function.
TERM assumes household maximize utility, assuming a Klein-Rubin functional form, which is a
non-homothetic utility form and subject to budget constraint . The model does not distinguish
1
regional and national government, but government activity functions include government taxes,
government income and expenditures. TERM considers two types of taxes, including commodity
tax and production tax. Dynamic features of the TERM follow the structures of ORANIG-RD
single region model, which includes equations representing rules for capital accumulation,
investment and wage adjustments (Horridge, 2012). Specifically, capital accumulation can be
represented as:

where K denotes the quantity of capital stock available to sector i in region r in year t, l
i,t
i,t
represents the quantity of investment in sector i in region r in year t and D represents the
i,t
rate of depreciation. The base year quantity of capital stock is provided exogenously, whereas
the level of investment is determined by the expected rate of return in sector i in region r in a
given time period. Horridge (2012) indicates that the investment mechanism in dynamic TERM
involves two basic assumptions: 1) investment/capital ratios are positively related to expected
rates of return and 2), expected rates of return converge to actual rates of return via a partial
adjustment mechanism. The two assumptions are represented in equations 2 and 3, respectively:

where G denotes gross rate of capital growth in the next period and E denotes expected gross
rate of return in the next period; M represents the ratio between the expected gross rates of
return E and normal gross rates of return R normal ; Q denotes (max/trend) investment/capital
ratio, and G trend is represented as a function of R normal . Implementation of the first equation
assumes that each sector has a long-run or normal rate of return and requires an exogenously
determined expected gross rate of return, whereas calibration of the second equations requires
to specific parameters, such as investment elasticities α, investment/capital ratio G and normal
gross rate of return R , all of which need to be provided exogenously.
normal

1 Non-homothetic means that rising income causes budget shares to change even with price ratio fixed.

International Congress on High-speed Rail: Technologies and Long Term Impacts - Ciudad Real (Spain) - 25th anniversary Madrid-Sevilla corridor 395