Book contents
- Frontmatter
- Dedication
- Contents
- List of Text Boxes
- Acknowledgments
- About This Book
- 1 Introduction to Computable General Equilibrium Models
- 2 Elements of a Computable General Equilibrium Model
- 3 The CGE Model Database
- 4 Final Demand in a CGE Model
- 5 Supply in a CGE Model
- 6 Factors of Production in a CGE Model
- 7 Trade in a CGE Model
- 8 Taxes in a CGE Model
- 9 Regulations in a CGE Model
- 10 Conclusion: Frontiers in CGE Modeling
- Model Exercises
- Appendix A Social Accounting Matrix for the United States, 2007 $U.S. Billions
- Appendix B Price and Quantity Variables and Definitions in a Standard CGE Model
- Glossary
- Practice and Review Answer Key 385
- Model Exercise Answer Key 391
- References
- Author Index
- Subject Index
7 - Trade in a CGE Model
Published online by Cambridge University Press: 02 February 2017
- Frontmatter
- Dedication
- Contents
- List of Text Boxes
- Acknowledgments
- About This Book
- 1 Introduction to Computable General Equilibrium Models
- 2 Elements of a Computable General Equilibrium Model
- 3 The CGE Model Database
- 4 Final Demand in a CGE Model
- 5 Supply in a CGE Model
- 6 Factors of Production in a CGE Model
- 7 Trade in a CGE Model
- 8 Taxes in a CGE Model
- 9 Regulations in a CGE Model
- 10 Conclusion: Frontiers in CGE Modeling
- Model Exercises
- Appendix A Social Accounting Matrix for the United States, 2007 $U.S. Billions
- Appendix B Price and Quantity Variables and Definitions in a Standard CGE Model
- Glossary
- Practice and Review Answer Key 385
- Model Exercise Answer Key 391
- References
- Author Index
- Subject Index
Summary
In this chapter, we present the building blocks for trade policy analysis using a computable general equilibrium (CGE) model. We begin by reviewing the trade data in the Social Accounting Matrix (SAM). Next, we introduce two concepts, the real exchange rate and terms of trade, and explain how they are represented in standard CGE models. We then focus on trade theory as we simulate and interpret the results of two types of shocks: a change in factor endowments that change comparative advantage, and a change in world prices that changes industry structure, trade, and factor returns. We study an example of “Dutch Disease,” a problem that illustrates the links between a change in world prices, the real exchange rate, and industry structure. We conclude with an explanation of the role of trade margin costs in international trade.
Since David Ricardo first developed the theory of comparative advantage, showing that nations gain from specializing in the goods that they produce at relatively lower cost, most students of economics have learned that all countries can gain from trade. Yet, many countries are reluctant to move too far or too fast toward free trade. Their reasoning is not inconsistent with Ricardo's theory. Trade and specialization lead to changes in a country's industry's structure and, in turn, to changes in the wages and rents of factors used in production. Therefore, although trade confers broad benefits on a country, it can also create winners and losers. Protecting, compensating, or managing the social and economic transition of those who lose has led many countries to qualify or delay their commitment to global free trade.
Since the early 1990s, CGE models have been widely used to analyze trade policy issues including unilateral trade liberalization, multilateral tariff reforms through the World Trade Organization (WTO), and preferential trade agreements such as the North American Free Trade Agreement (NAFTA) and the European Union's expansion. The contributions made by CGE models rest on their ability to identify which industries will grow or could contract with freer trade, to describe whether labor or capital will gain or could lose from trade reforms, and, perhaps most important, to measure welfare effects, which summarize the overall effects of changing trade policies on an economy's well-being.
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- Introduction to Computable General Equilibrium Models , pp. 168 - 192Publisher: Cambridge University PressPrint publication year: 2017