Overview of economy-wide nafta models

Abstract

In the recent debate about the costs and benefits of the North American Free Trade Agreement (NAFTA), both proponents and opponents used the empirical results of several economic models to support their arguments. Most of the quantitative estimates were provided by computable general equilibrium (CGE) models, which are part of the growing literature known as applied general equilibrium. The CGE model is a powerful tool that can make important contributions to policy debates. Compared to other approaches, CGE models rest on a relatively more solid theoretical foundation. However, the numerical analysis has to be interpreted properly. Quantitative estimates are highly tentative and contingent on the assumptions of the models. Thus, estimates should not be interpreted as predictions but rather as providing some indication of the direction of the various economic changes induced by a certain policy change. This paper provides an overview of the CGE approach, and of its application to NAFTA. After outlining how a CGE model works, it reviews some of the quantitative results of CGE models used to assess the impact of NAFTA. The paper is intended for an audience not trained in economics.