About

Extended Single-Country World Economic Forecasting Model

Introduction and origins of the model

The World Economic Forecasting Model (WEFM), a successor to the influential Project LINK model initiated by Nobel Laureate Lawrence Klein in the 1960s, is developed and managed by the United Nations Department of Economic and Social Affairs (DESA). Originally designed to enhance global economic forecasting, Project LINK connected over 100 economists from 60 countries. Today, WEFM covers 176 countries, linking individual country models through a trade matrix that ensures consistency in global trade data. Built on a common theoretical structure with error-correction principles, it balances short-term data-driven dynamics with long-term macroeconomic theory. Each country model, with about 60 equations, captures key national economic behaviours, while global factors like oil prices, exchange rates, and domestic policies influence short-term outcomes. Medium-term projections focus on gross domestic product (GDP) reaching potential, inflation targeting, and the stabilization of key indicators such as government debt and unemployment, with limited emphasis on fine-tuned policy interventions. WEFM remains central to the United Nations’ analysis of global economic trends, informing the flagship World Economic Situation and Prospects report.

What is the Extended Single-Country WEFM?

The Extended Single-Country World Economic Forecasting Model (WEFM) is adopted from the globally recognized model, which is customized to undertake extended macro-fiscal analysis and forecasting to meet the specific needs of selected Arab countries (Altshuler and Sarangi, 2022).

The Extended Single-Country WEFM is a structural macro-econometric model comprising approximately 80 equations, including around 20 key behavioural relationships. In the long run, the model follows a neo-classical supply-side framework. In the short term, it is primarily driven by Keynesian demand-side dynamics. It incorporates backward-looking expectations (lagged dependent variables) and policy rules—both monetary and fiscal—designed to simulate real-world policy development. All sectors are interconnected through an accounting framework.

The model’s core econometric structure is based on a cointegration error correction model, which is used to estimate behavioural relationships.

The model includes four types of agents:

• Households: They consume goods and supply labour.
• Firms: They produce goods, employ labour (demand from households), and drive investment demand.
• Government: It collects taxes, spends on public consumption, borrows (contributing to public debt accumulation), and makes interest payments.
• International markets: Domestic firms engage in export and import activities, where external demand is treated as exogenous.

Country-specific adjustments

The main adjustments of the model lie within the Government block. It has been expanded in comparison to the original model to provide a more detailed analysis of government revenue, expenditure, and debt, which is especially relevant to analyse public expenditures in the Arab countries. In particular, the detailed representation of social expenditures allows for the analysis of policy interventions as stipulated in national strategic documents such as the Economic Modernization Vision of Jordan or Vision Tunisia 2035. 

Government revenue is disaggregated into four components:

• Income, profits, and capital gains taxes (GGRTIX)
• Goods and services taxes (GGRTOX)
• International trade taxes (GGRTTX)
• Other revenue (GGRO)

Revenue is calculated by multiplying tax rates by their relevant economic bases (e.g., income, trade, etc.), while other revenue follows nominal GDP growth. The total revenue (GGR) is the sum of all revenue sources. Such settings allow for simulating changes to tax regimes in the Arab countries, including increases in the value-added tax (VAT) rates, reduction of the informal economy and subsequent increases in the collection of direct taxes.

Government expenditure includes:

• Social expenditures: education, health, housing, social protection and subsidies, labour market and jobs, arts, culture and sports, and environmental protection.
• Other expenditures (GGXO)
• Interest payments on debt (GGEI)

Social expenditures grow based on a mix of trend output growth and GDP adjusted for terms of trade. Interest payments are broken into domestic and foreign components, with different rules for growth, and are exogenized for scenario analysis (entered by the user in the interface). Such detailed representation of government expenditures allows for very detailed modelling of the economic consequences of the additional government spendings as outlined in the national development strategies.

Net lending is the difference between government revenue and expenditure.

Government debt is split into foreign and domestic. Total government debt is the sum of domestic and foreign debt (converted into domestic currency using the exchange rate). Each period, the deficit is financed by a mix of domestic and foreign borrowing. This allows for the detailed modelling of the evolution of public debt, depending on the exchange rates and national borrowing strategies.

Interest payments on debt are calculated for domestic and foreign debt. This allows for the modelling of both changes to costs and risks associated with changes to the structure of debt. In particular, the higher cost of domestic borrowing can be reflected, as well as the surge in risks associated with the shifts in the currency structure of debt.