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Macroeconomic Module

The Stochastic Energy Deployment System's (SEDS's) macroeconomic module is a basic economic growth model of the "Solow" variety. This type of model is used to analyze long-run economic growth, and does not represent the business cycle, monetary policy or inflation, or unemployment.

The macroeconomic module calculates aggregate economic output—U.S. real gross domestic product (GDP)—as a function of aggregate capital and labor inputs, and an exogenous productivity trend. The growth rate of the capital stock is determined by an exogenous savings rate allocating a share of gross output to investment, and an exogenously specified deprecation rate. In this version, the production function is Cobb-Douglas.

Focus of Analysis

The version currently embedded in the integrated SEDS model is designed for testing, calibration, generating key macroeconomic inputs for the SEDS energy market modules, and analyzing the unidirectional effects on the dynamics of the energy system of different assumptions regarding long-run economic growth, including influences on effects of energy and greenhouse gas policies.

Limitations of Analysis

This version does not incorporate feedbacks from the energy system to economic growth. Work is in progress on a form of the module that will incorporate these feedbacks.

Overview of Methodology

The macroeconomic module is designed to conform for the most part to the measurement and accounting conventions of the National Income and Product Accounts (NIPA) produced by the U.S. Bureau of Economic Analysis. GDP is measured in chained 2000 dollars. Capital is interpreted as aggregate physical capital represented by total "Fixed Assets" and is also measured in chained 2000 dollars.

Investment represents combined private and government investment, so that the savings rate in the model does not directly correspond to the "savings rate" as estimated in the NIPA. The "interest rate" is defined, as in the theoretical literature, as the marginal product of capital minus the depreciation rate. Labor is defined as millions of persons employed in the private (or "business") sector, as in the U. S. Bureau of Labor Statistics data.

The exogenous productivity trend is given the standard interpretation (in models of this type) of representing total factor productivity growth. (In the Cobb-Douglas form this is equivalent, up to a scaling, to both labor-augmenting and capital-augmenting productivity growth.) The "consumption" variable in this model encompasses both private and government consumption. Both manufacturing output and disposable income are defined as fixed percentages of real GDP, corresponding to observed historical relationships.

Major Assumptions

In the course of development, the model was first calibrated to U. S. historical data for several intervals to gauge its capacity to represent historical dynamics: 1949-2006, 1981-2006, and 1995-2006. This revealed the need to assume upward trends in both the savings and depreciation rates, in contrast to the theoretical model's assumption that these are constant. The model was then calibrated to reproduce the real GDP growth rate to 2030 in the U. S. Energy Information Administration's Annual Energy Outlook (AEO), Revised 2008.

Initial values of key parameters—including productivity, savings rate, and capital depreciation—were derived from year 2005 data. The labor force growth rate was set to match that in the AEO. The AEO GDP projection was reproduced by adjusting the productivity trend as well as assuming small upward trends in the savings and depreciation rates (as in the historical calibration). Projection to 2050 is obtained by maintaining the assumed 2005-2030 labor force growth rate and parameter trends.

Stochastic Inputs

Although not assigned probability distributions, the key parameters governing dynamic trends are represented in Analytica so as to be easily varied for scenario sensitivity analyses.

Key Inputs from Other Modules

None in this version. The version under development will include energy demands and expenditures and capital investments from other modules.

Key Outputs to Other Modules

Key outputs to other SEDS modules include real GDP and growth rate; per capita total and disposable income, manufacturing output and growth rate; and interest rate.

Attachments

SEDS Macroeconomic Module

Author

Alan H. Sanstad, Lawrence Berkeley National Laboratory