A New Growth Path for Europe

The GEM-E3 model starts from the same basic structure as the standard World Bank models2. Following the tradition of these models, GEM-E3 is built on the basis of a Social Accounting Matrix (Decaluwe, Martens and Monette 1987; Decaluwe and Martens 1988) and explicitly formulates demand and supply equilibrium. Technical coefficients in production and demand are flexible in the sense that producers can alternate the mix of production not only regarding the primary production factors but also the intermediate goods. Production is modeled through KLEM (capital, labor, energy and materials) production functions involving many factors (all intermediate products and two primary factors – capital and labor). At the same time, consumers can also endogenously decide the structure of their demand for goods and services. Their consumption mix is decided through a flexible expenditure system involving durable and non-durable goods. The specification of production and consumption follows the generalized Leontief type models3 as initiated in the work of Jorgenson.