Transcript Lecture 5
EC 936 ECONOMIC POLICY MODELLING LECTURE 5: MODELS OF TRADE AND TRADE POLICY: CGE PERSPECTIVES ON TRADE LIBERALIZATION 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 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 HOW TO MODEL TRADE • SINGLE COUNTRY MODELS VS. • WORLD TRADE MODELS 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 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. FACTOR PRICE EFFECTS • Relative wages increase while returns to capital fall Assumes factor mobility elasticity as follows: Capital: σf = 0 Labour: σf = -1 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 CONSUMER PRICE EFFECTS • Nominal consumer prices fall more in industry than in agriculture or services • Cost of living effects vary across regions and countries 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 CLOSURE MATTERS • Modelling domestic savings: Senegal vs. Benin • Factor mobility assumption: short-run vs. longrun (i.e. change σf for capital from 0 to -1) • Government closure assumptions: revenue effects (sales tax vs. production/income tax) MULTI-COUNTRY MODELS • GTAP (GLOBAL TRADE ANALYSIS PROJECT) – Local closure vs. global closure rules – Product differentiation by country – International factor mobility – Political reaction functions H. Explore Market Clearing Constraints Run the GTAP model