CONSIDERATION OF MODELING FREIGHT TRANSPORTATION COST IN COMPUTABLE GENERAL EQUILIBRIUM FRAMEWORK

Computable general equilibrium (CGE) model is widely used to investigate the economic impacts of freight transportation cost reduction brought by the development of transportation infrastructure. When using CGE model for this kind of policy evaluation, it is important to model the freight transportation cost appropriately with the limited availability of data. This study considers two representative models of transportation cost. The first is 1) iceberg transportation cost model and the second is 2) transportation sector model. With both analytical calculation and numerical simulation, this study identifies the properties of the bias of each model’s assumption that distorts the evaluation of the economic impacts of transportation cost reduction. Then, this study considers the appropriate modeling of transportation cost and the appropriate procedure when using CGE model in order to reduce these bias.