This research program aims to develop a dynamic stochastic general equilibrium model for the Saudi economy. The model will be used for simulations and exercises designed to assess the economic impact and opportunity costs of alternative public policy options.
Opportunity cost refers to the economic value of an alternative decision to the one taken. This idea has particular relevance for an economy which owns and produces a natural resource that it can allocate to many uses. In the case of Saudi Arabia, an accurate assessment of the opportunity cost of alternative policies is key. For instance, its energy sector is, by far, the most relevant economic activity. Most Saudi policies have an impact on the share of oil it exports, the share it uses domestically and the value of that oil. Thus, increasing the price of electricity, introducing a value-added tax, or developing public transportation are examples of policies that will affect the domestic consumption of oil, the international oil price and, ultimately, social welfare.