Public sector output is assumed to represent a Cobb-Douglas aggregation of market commodities:
As is the case for intermediate demand, an Armington aggregation of domestic and imported inputs defines public sector demand:
Public sector output is exogenous, however the composition of public sector inputs responds to relative prices, gross of applicable tax, hence:
A representative agent determines final demand in each region. These consumers are endowed with primary factors, tax revenue, and an exogenously-specified net transfer from other regions. This income is allocated to investment, public demand and private demand. Investment and public output are exogenous while private demand is determined by utility maximizing behaviour. The utility function is Cobb-Douglas:
As in the case of intermediate and public demand, an Armington aggregation of domestic and imported inputs defines each commodity, so
Aggregate final demand is then defined by regional expenditure and the unit price of aggregate of domestic and imported goods, gross of applicable tax:
Regional expenditure (Mr) includes factor income, net capital flows and tax revenue, net of the cost of investment and public expenditure.