An analysis of the effects of electronic commerce on the Korean economy using the CGE model

Abstract

The purpose of this paper is to analyze the economic effects of foreign direct online purchasing on the Korean economy using computable general equilibrium and to analyze the future growth of electronic commerce. We assumed that foreign online direct purchasing has reduced transaction costs in two ways: reduction of tariff equivalents and a decline in direct import prices. Simulation results showed that the reduction of both tariff equivalents and import prices due to an increase in foreign direct online purchasing increased the public welfare of the Korean economy. We also found that the reduction of import prices had a greater impact on the welfare increase than did the tariff reduction. Therefore, electronic commerce has a positive impact on the Korean economy, and we expect that businesses in the field will be diversified and prosper in the future.

Appendix

1.1 24 Equations for the CGE model⁴

• 1. Composite factor aggregation function: $Y_{j} = b_{j} \mathop \prod \nolimits_{h} F_{hj}^{{\beta_{hj} }}$

• 2. Factor demand function: $F_{hj} = \frac{{\beta_{hj} p_{j}^{y} }}{{r_{h} }}Y_{j}$

• 3. Intermediate demand function: $X_{ij} = ax_{ij} Z_{j}$

• 4. Composite factor demand function: $Y_{j} = ay_{j} Z_{j}$

• 5. Unit cost function: $P_{j}^{s} = ay_{j} p_{j}^{y} + \mathop \sum \nolimits_{i} ax_{ij} p_{i}^{q}$

$ay_{j}$: the coefficient for minimum requirements of value added for one unit of gross outputs, $p_{j}^{s}$: supply price of the jth good, $p_{i}^{q}$: price of the jth intermediate good, $p_{j}^{y}$: price of value added of the jth firm

• 6. Direct tax revenue function: $T_{j} = \tau_{j} Z_{j}$

• 7. Production tax revenue function: $TZ_{j} = \tau z_{j} P_{j} Z_{j}$

• 8. Import tariff revenue function: $T_{i}^{m} = \tau m_{i} p_{i}^{m} M_{i}$

• 9. Government demand function: $X_{i}^{g} = \frac{{\mu_{i} }}{{p_{i}^{q} }}\left( {\mathop \sum \nolimits_{j} T_{j} - S^{g} } \right)$

$X_{i}^{g}$: public consumption of the ith commodity, T_j: tax revenue from production of the jth commodity, τ_j: tax rate on production of the jth commodity in terms of local currency per unit, S^g: public saving, μ_i: share of expenditure for the jth commodity

• 10. Investment demand function: $X_{i}^{v} = \frac{{\lambda_{i} }}{{p_{i}^{q} }}\left( {S + S^{g} + \varepsilon S^{f} } \right)$

S: private saving, S^f: foreign saving, $X_{i}^{v}$: investment demand for the ith commodity, ε: exchange rate, λ_i: share of expenditure for the ith commodity ($0 \le \lambda_{i} \le 1,\mathop \sum \nolimits_{i} \lambda_{i} = 1).$

• 11. Private saving function: $S^{p} = {\text{ssp}} \cdot \sum\nolimits_{h} {FF\left( h \right)p_{h}^{f} }$

• 12. Government saving function: $S^{g} = {\text{ssg}} \cdot ({\text{Td}} + \sum\nolimits_{j} {Tz_{j} + \sum\nolimits_{j} {Tm_{j} } } )$

• 13. Household demand function: $X_{i}^{p} = \frac{{\alpha_{i} }}{{p_{i}^{q} }}(\sum\nolimits_{h} {r_{h} FF_{h} - S} ) \forall i$

• 14. World export price equation: $p_{i}^{e} = {{\upvarepsilon }}p_{i}^{{W_{e} }} , \quad \forall i$

• 15. World import price equation: $p_{i}^{m} = {{\upvarepsilon }}p_{i}^{{W_{m} }} , \quad \forall i$

• 16. Balance of payments: $\mathop \sum \limits_{{}} P_{i}^{{W_{e} }} E_{i} + S^{f} = \mathop \sum \limits_{{}} p_{i}^{{W_{m} }} M_{i}$

$P_{i}^{{W_{e} }}$: export price of the ith commodity in foreign currency terms, $P_{i}^{{e_{{}} }}$: export price of the ith commodity in local currency terms, E_i: amount of exports of the ith commodity, $P_{i}^{{W_{m} }}$: import price of the ith commodity in foreign currency terms, $P_{i}^{{m_{{}} }}$: import price of ith commodity in local currency terms, M_i: amount of imports of the ith commodity

• 17. Armington Function: $Q_{i} = \gamma_{i} \left( {\delta m_{i} M_{i}^{{\eta_{i} }} + \delta d_{i} D_{i}^{{\eta_{i} }} } \right)^{{\frac{1}{{\eta_{i} }}}}$

D_i: input of the ith domestically produced good, γ_i: productivity parameter of the ith composite good production function, $\delta m_{i} ,\delta d_{i}$: share parameter of the ith composite good production function $(\delta m_{i} + \delta d_{i} = 1, \delta m_{i} , \delta d_{i} \ge 1)$, η_i: parameter related to elasticity of substitution; $\begin{aligned}\eta_{i} = \left( {\sigma_{i} - 1}\right)/\sigma_{i},\quad \eta_{i} \le 1, \sigma_{i} & = - {{\frac{{{\text{d}}\left( {\frac{{M_{i} }}{{D_{i} }}} \right)}}{{\frac{{M_{i} }}{{D_{i} }}}}} \mathord{\left/ {\vphantom {{\frac{{{\text{d}}\left( {\frac{{M_{i} }}{{D_{i} }}} \right)}}{{\frac{{M_{i} }}{{D_{i} }}}}} {\frac{{{\text{d}}\left( {\frac{{p_{i}^{m} }}{{p_{i}^{d} }}} \right)}}{{\frac{{p_{i}^{m} }}{{p_{i}^{d} }}}}}}} \right. \kern-0pt} {\frac{{{\text{d}}\left( {\frac{{p_{i}^{m} }}{{p_{i}^{d} }}} \right)}}{{\frac{{p_{i}^{m} }}{{p_{i}^{d} }}}}}}:\,{\text{ elasticity}}\,{\text{of}}\,{\text{substitution}} \\ \end{aligned}$

• 18. Import demand function: $M_{i} = \left( {\frac{{\gamma_{i}^{{\eta_{i} }} \delta m_{i} p_{i}^{q} }}{{p_{i}^{m} }}} \right)^{{\frac{1}{{1 -\eta_{i} }}}} Q_{i}$

• 19. Domestic good demand function: $D_{i} = \left( {\frac{{\gamma_{i}^{{\eta_{i} }} \delta d_{i} p_{i}^{q} }}{{p_{i}^{d} }}} \right)^{{\frac{1}{{1 -\eta_{i} }}}} Q_{i}$

• 20. Transformation function: $Z_{i} = \theta_{i} \left( {\xi e_{i} E_{i}^{{\varphi_{i} }} + \xi d_{i} D_{i}^{{\varphi_{i} }} } \right)^{{\frac{1}{{\varphi_{i} }}}}$

θ_i: productivity parameter of the ith firm’s transformation function, $\xi e_{i} ,\xi d_{i}$: share parameters of the ith firm’s transformation function $(\xi e_{i} + \xi d_{i} = 1, \xi e_{i} ,\quad \xi d_{i} \ge 0),\phi_{i}$: parameter related to elasticity of transformation; $\phi_{i} = \left( {\psi_{i} + 1} \right)/\psi_{i} , \phi_{i} \ge 1$, $\psi_{i} = - {{\frac{{{\text{d}}\left( {\frac{{E_{i} }}{{D_{i} }}} \right)}}{{\frac{{E_{i} }}{{D_{i} }}}}} \mathord{\left/ {\vphantom {{\frac{{{\text{d}}\left( {\frac{{E_{i} }}{{D_{i} }}} \right)}}{{\frac{{E_{i} }}{{D_{i} }}}}} {\frac{{{\text{d}}\left( {\frac{{p_{i}^{e} }}{{p_{i}^{d} }}} \right)}}{{\frac{{p_{i}^{e} }}{{p_{i}^{d} }}}}}}} \right. \kern-0pt} {\frac{{{\text{d}}\left( {\frac{{p_{i}^{e} }}{{p_{i}^{d} }}} \right)}}{{\frac{{p_{i}^{e} }}{{p_{i}^{d} }}}}}}$: elasticity of transformation of the ith firm’s transformation function

• 21. Export supply function: $E_{i} = \left[ {\frac{{\theta_{i}^{{\varphi_{i} }} \zeta e_{i} \left( {\tau_{i} + p_{i}^{s} } \right)}}{{p_{i}^{e} }}} \right]^{{\frac{1}{{1 - \varphi_{i} }}}} Z_{i}$

• 22. Domestic good supply function: $D_{i} = \left[ {\frac{{\theta_{i}^{{\varphi_{i} }} \zeta d_{i} \left( {\tau_{i} + p_{i}^{s} } \right)}}{{p_{i}^{d} }}} \right]^{{\frac{1}{{1 - \varphi_{i} }}}} Z_{i}$

• 23. Market clearing condition: $Q_{i} = X_{i}^{p} + X_{i}^{t} + X_{i}^{v} + \mathop \sum \nolimits_{j} X_{ij}$

• 24. Factor market clearing condition: $\mathop \sum \nolimits_{j} F_{hj} = FF_{h}$