A Primer on Static Applied General Equilibrium Models

Abstract

The debate that has raged over the North American Free Trade Agreement (NAFTA) has focused attention on the economic models used to analyze its potential impact on the economies of Canada, Mexico, and the United States. Since static applied general equilibrium (AGE) models have been used extensively over the past 20 years to analyze government policies in both developed and less developed countries (see, for example, Shoven and Whalley 1984, 1992), not surprisingly, they were also usually the tools of choice when researchers began studying the potential impact of NAFTA (Francois and Shiells 1994). In fact, at a U.S.International Trade Commission conference held in February 1992 and open to all economists studying the economywide impact of NAFTA, 11 of the 12 studies presented used AGE models (U.S. International Trade Commission 1992). In Chapter 2, we examine some specific applications of static AGE models to NAFTA. Here, though, we try to describe the basic structure of AGE models and give some sense of their reliability.