A Policy Simulation Analysis on Parts and Material Industry in Korea Using A Computable General Equilibrium Model

In this paper, we examine the effects of various industrial policies on the Korean economy using a dynamic general equilibrium model. We consider industria1 policies such as corporate income tax and subsidy as well as R&D subsidy policy. In the model we classify household sector into 10 income groups and classify production sector into 38 industries. In particular we distinguish the parts and material industry from the finished manufactured good industry. Policy simulation is designed to investigate the difference in policy effects between parts and material industry and finished manufactured good industry. Also we try to find out which policy is better in terms of efficiency and equity criteria using the same amount of funds. Findings of policy simulation are as follows. Firstly, the R&D subsidy policy is more persistent and effective than tax and subsidy policy in terms of output effect and other macroeconomic effects. Secondly, when the government adopts either corporate income tax cut or subsidy increase, the support for the parts and material industry is more effective than the support for the final good industry in terms of output increase and labor supply and capital formation. Thirdly, the corporate income tax cut policy is better than subsidy policy in terms of the effect on GDP, capital formation during 2007-2030 period. Finally, when it comes to the R&D subsidy policy, the parts and material industry subsidy is better than the finished manufactured good industry in terms of the output effect and technology transfer effect.