EC 936 ECONOMIC POLICY MODELLING LECTURE 5: MODELS OF TRADE AND TRADE POLICY: CGE PERSPECTIVES ON...
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Transcript of EC 936 ECONOMIC POLICY MODELLING LECTURE 5: MODELS OF TRADE AND TRADE POLICY: CGE PERSPECTIVES ON...
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EC 936 ECONOMIC POLICY MODELLING
LECTURE 5:
MODELS OF TRADE ANDTRADE POLICY:
CGE PERSPECTIVES ON TRADE LIBERALIZATION
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TRADE ISSUES
• Exogenous shocks – Terms of trade– Changes in international capital flows
• Policy shocks– Tariffs and export subsidies– Non-tariff barriers (quotas, etc.)– Domestic taxes and subsidies
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WHY CGE MODELS?
• Compensating equivalence strategy (partial equilibrium measures)
• Trade liberalization influences product prices, factor prices, tax rates, thus requiring general equilibrium analysis
• Counterfactual possibilities of CGE modelling
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HOW TO MODEL TRADE
• SINGLE COUNTRY MODELS
VS.• WORLD TRADE MODELS
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SINGLE COUNTRY MODELS
• Some lessons from Asia and Africa using micro-macro simulation approaches– Bangladesh– India– Nepal– Pakistan– Philippines– Benin– Senegal
Source: Cockburn, Decaluwe and Robichaud, 2007
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TRADE AND OUTPUT EFFECTS
• Industrial production increases relative to agricultural output because:
(i) import price reductions have a relatively small effect on domestic demand for local products, given imperfect substitutability and low initial levels of import penetration;
(ii) industrial exports respond positively to tariff cuts;
(iii) input costs fall faster in industry than in agriculture.
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FACTOR PRICE EFFECTS
• Relative wages increase while returns to capital fall
Assumes factor mobility elasticity as follows:
Capital: σf = 0
Labour: σf = -1
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HOUSEHOLD INCOME EFFECTS
• Nominal income tends to fall in rural areas
• Nominal income tends to fall in urban areas, but by less than rural income
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CONSUMER PRICE EFFECTS
• Nominal consumer prices fall more in industry than in agriculture or services
• Cost of living effects vary across regions and countries
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WELFARE AND POVERTY IMPACTS
• Trade liberalization increases total welfare
• Trade liberalization reduces overall poverty but with different sectoral effects
• Trade liberalization tends to lower urban poverty
• Trade liberalization may increase rural poverty
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CLOSURE MATTERS
• Modelling domestic savings: Senegal vs. Benin
• Factor mobility assumption: short-run vs. long-run (i.e. change σf for capital from 0 to -1)
• Government closure assumptions: revenue effects (sales tax vs. production/income tax)
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MULTI-COUNTRY MODELS
• GTAP (GLOBAL TRADE ANALYSIS PROJECT)– Local closure vs. global closure rules– Product differentiation by country– International factor mobility– Political reaction functions
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H. Explore Market Clearing Constraints
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Run the GTAP model
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