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EC 936 ECONOMIC POLICY MODELLING

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.)

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EC 936 ECONOMIC POLICY MODELLING

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  1. EC 936 ECONOMIC POLICY MODELLING LECTURE 5: MODELS OF TRADE AND TRADE POLICY: CGE PERSPECTIVES ON TRADE LIBERALIZATION

  2. 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

  3. 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

  4. HOW TO MODEL TRADE • SINGLE COUNTRY MODELS VS. • WORLD TRADE MODELS

  5. 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

  6. 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.

  7. FACTOR PRICE EFFECTS • Relative wages increase while returns to capital fall Assumes factor mobility elasticity as follows: Capital: σf = 0 Labour: σf = -1

  8. 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

  9. CONSUMER PRICE EFFECTS • Nominal consumer prices fall more in industry than in agriculture or services • Cost of living effects vary across regions and countries

  10. 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

  11. 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)

  12. 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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