The fixed-point computational algorithms introduced by Herbert Scarf has been widely used to solve the numerical solutions of large general equilibrium models since the 1970’s. This algorithmic approach based on a computational model is capable of evaluating more realistically government policies which may be too complex to be handled analytically. The U.S. NBER (National Bureau of Economic Research) has further designed a computer system to provide such algorithms.
The purpose of this study is to attempt to build a general equilibrium model for the Taiwan economy with fifteen production sectors, ten consumption sectors, plus government and investment sectors. The capital, labor and imported intermediate goods are further considered as the three input sectors. of the economy. The constructed model is used to analyze the incidence of both the value-added tax introduced recently by the government and the tariff reductions which are expected to play an important role in fiscal policy in the near future. The fixed-point computational algorithms designed by the NBER are used to solve the equilibrium solution.
The results indicate that the substitution of the value-added tax produces an insignificant income redistribution effect between capital and labor but increases the Gini coefficient. On the other hand, different tariff reductions generate different economic effects. On the whole, a reduction in tariffs on goods used as inputs is favored more than that on consumption goods.
