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123 Model

123 Model

As part of the initiative for Open Data, Open Knowledge, and Open Solutions, the 1-2-3 model (1 country, with 2 producing sectors, and 3 goods – hence 1-2-3) is a user-friendly fiscal tool developed at the World Bank to introduce many to quantitative economic modeling. The 1-2-3 model provides a good starting point to computable general equilibrium (CGE) models. It makes transparent the mechanisms by which an external shock or policy change affects the economy. It captures, in a stylized manner, features characteristic of developing countries. It has two productive sectors: one producing tradable goods and the other producing nontradables, allowing for analysis of the real exchange rate and its effects on the international competitiveness of the country. Within the category of tradable goods, it distinguishes importables and exports. Such a characterization enables us to look at terms-of-trade shocks as well as the impact of policy instruments such as import tariffs and export subsidies. While small, it is a rigorous tool that can analyze a similar rich array of issues. We can examine the impact of an increase in the price of oil (or other import and/or export prices). In addition, this model enables us to look at the use of trade and fiscal policy instruments: export subsidies, import tariffs, and domestic indirect taxes. The implications of increases or decreases in foreign capital inflows can also be studied with this framework.

A major advantage of the 1-2-3 model is its simplicity. Ideal for countries with severe data constraints (e.g. low-income countries, small island economies etc.), its data consists mainly of three available sources - national income accounts (GDP and its expenditure components), external balance of payments information, and fiscal accounts (tax revenues and government expenditure components from IMF GFS or staff reports). It is user friendly – it can be solved numerically by using the most widely-available, PC-based spreadsheet programs – e.g. Excel; hence, it is not necessary to learn a new, difficult programming language in order to get started. It is transparent – it can be solved analytically either graphically or algebraically. Although it is not a substitute for the details and capability of more complex multisector models, it introduces the approach used to solve larger, multi-sector CGE models and can help anticipate some of the results obtained from the latter.

The 1-2-3 Model is now well documented and has been applied to a variety of policy problems. In the near future, the key papers, programs and user guide will be provided below. In addition, the database is also being updated to cover over 200 countries and will be posted below.

Working paper on the basic 123 model (1,693 KB)

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