An Applied General Equilibrium Analysis of NAFTA’s Impact on Canada

Abstract

In conjunction with the Canada-U.S. Free Trade Agreement (CAFTA) of 1988, the North American Free Trade Agreement (NAFTA) will result in an elimination of tariff barriers between Canada, the United States, and Mexico. In this chapter I examine the impact of NAFTA on the Canadian economy. My investigation is based on an applied general equilibrium (AGE) model of the Canadian economy, which I refer to as the general equilibrium trade (GET) model. As with other AGE models, the focus of the GET model is on the underlying microeconomic structure of the economy. The model can be used to examine the effect of the tariff reductions in NAFTA on the allocation of resources across the various sectors of the economy, on the pattern and volume of trade, and the level of aggregate real income.