Effects of Protection in a General Equilibrium Framework

Abstract

W HILE there are many general equilibrium models of trade and protection in the literature on economic theory, most empirical analyses of protection use partial equilibrium models. However, partial equilibrium analysis is useful only if the general equilibrium effects can be ignored safely. It is the contention of this paper that the production effects of protection should be analysed in a dynamic general equilibrium framework with investment and the foreign exchange rate as endogenous variables.' In section II, a dynamic general equilibrium model of trade and protection for the systematic analysis of alternative trade policies in a market economy, and the important tactical decisions made for empirical implementation using Australian data are described. The estimates of effective protection obtained from the model are presented in section IIL'2 The differences between the partial and general equilibrium approach are discussed in section IV and the conclusions summarized in section V.