General Equilibrium Trade Research Articles

Melitz in GTAP Made Easy: the A2M Conversion Method and Result Interpretation

Since the 1970s, Armington has been the workhorse specification of trade in computable general equilibrium (CGE) models. Under Armington, agents substitute between products from different countries. Conceptually, Melitz provides a more attractive approach in which substitution is between products from different firms rather than countries. Other attractive features of Melitz are monopolistic competition and economies of scale from fixed establishment costs for firms and fixed set-up costs on trade links. In this paper, we show how, with little change to existing code, an Armington model can be converted to Melitz by adding a few equations and introducing closure swaps. We apply our Armington-to-Melitz method to the Armington-based Global Trade Analysis Project (GTAP) model to derive GTAP-Armington-to-Melitz (GTAP-A2M). We show how results from a CGE model with Melitz industries can be interpreted via back-of-the-envelope calculations. In simulations of the effects of a tariff imposed by North America on imports of apparel, we find greater welfare losses for exporting regions under Melitz than under Armington principally because contraction of apparel output in these regions under Melitz generates an increase in the cost to their households of domestic apparel. Finally, we review two other Melitz-based versions of GTAP: GTAP-HET and a recently published model by Bekkers and Francois.

Dynamics of Firms and Trade in General Equilibrium

This paper develops a dynamic general equilibrium model that tries to reconcile the observation that aggregate movements of exports and imports are disconnected from real exchange rate movements, while firm-level exports co-move significantly with the real exchange rate. Firms are heterogenous, facing recurrent aggregate and firm-product specific productivity shocks, choose which goods to export, and decide to enter and exit the business endogenously. We calibrate and estimate the model with both aggregate and firm level data from Japan.

Energy Demand and Trade in General Equilibrium

This paper sheds light on the impact of alternative environmental policies on energy demand, global \({ CO}_2\) emissions, trade, and welfare. For this, we develop an Eaton–Kortum type general equilibrium model of international trade which includes an energy sector. We structurally estimate the key parameters of the model and calibrate it to the data on 31 OECD countries and the rest of the world in the year 2000. The model helps assessing the relative welfare effects under alternative environmental policies. We find that, when carbon spillover effects are absent, taxing energy resources as an input in energy production is preferable to taxing domestic energy production in terms of minimizing \({ CO}_2\) emissions. However, with negative externalities on foreign customers domestic energy output should be taxed to minimize world carbon emissions given a certain level of welfare change for all countries.

Dynamics of Firms and Trade in General Equilibrium

This paper develops a dynamic general equilibrium model that attempts to reconcile the observation that aggregate movements of exports and imports are disconnected from real exchange rate movements, while firm-level exports co-move significantly with the real exchange rate. Firms are heterogeneous, facing recurrent aggregate and firm-product specific productivity shocks, choose which goods to export, and decide to enter and exit the business endogenously. We calibrate and estimate the model with both aggregate and firm level data.

Time zone differences as trade barriers

This paper estimates the impact of time zone differences between trading locations on trade costs and trade in general equilibrium. Using homogeneous bilateral trade data between US states and Canadian provinces, time zone differences are found to reduce bilateral trade by 11% on average, which amounts to about one-sixth of the international border effect between the US and Canada.

Trans Pacific Stategic Economic Partnership With Japan, South Korea and China Integrate: General Equilibrium Approach

Problem statement: The Trans-Pacific Strategic Economic Partnership Agreement (TPP) is a high standard and broad based Free Trade Agreement that aims to integrate the economies of the Asia-Pacific region. Recently, the US is pressing Japan to join the group. Japan is considering joining the TPP because of the dual considerations of its own economy and the political situation in East Asia. While, South Korea has yet to agree to join the TPP over concerns that their agriculture will be seriously affected. In addition, Japan and the US are employing both military and economic strategies to isolate China. However, China has contacted those already participating in TPP negotiations and shares some common views with Japan and South Korea on agricultural issues. Therefore, in this study, we attempt to assess the possibility of reaching full trade liberalization or trade creation through the TPP with the addition of new member countries including Japan, Korea and China. Approach: A Computable General Equilibrium (CGE) or Global Trade Analysis Project (GTAP) model is used to evaluate the economic effects of a TPP agreement among TPP countries with trade creation. In this study, seven cases were created to distinguish the welfare and trade effects of policy changes. Results: We found that the new member countries among TPP countries with East Asia countries including Japan, South Korea and China would benefit from the FTA among member countries. They gain much more from the real GDP and welfare than the TPP agreement, particularly Vietnam and Korea. This is particularly a fact for trade in the meat product sectors between TPP with Japan, Korea and China, which most of them gain benefit. Conclusion: Therefore, the TPP would benefit both economies and welfare with the eliminate tariff rate.

Unions, competition and international trade in general equilibrium

We develop a two-country, multi-sector model of oligopoly in which unionised and non-unionised sectors interact in general equilibrium. The model is used to study the impact of trade liberalisation, deunionisation and firm entry on wages in unionised and non-unionised sectors, and on welfare. We find that a shift from autarky to free trade increases non-union wages and welfare, whereas the effect on union wages is ambiguous. We also show that partial deunionisation leads to higher wages in both unionised and non-unionised sectors, but only increases welfare when the proportion of unionised sectors is sufficiently low. Finally, wages in non-unionised sectors necessarily increase with firm entry, while the response of union wages and welfare depends on the trade regime.

Unions, Competition and International Trade in General Equilibrium

We develop a two-country, multi-sector model of oligopoly in which unionised and non-unionised sectors interact in general equilibrium. The model is used to study the impact of trade liberalisation, deunionisation and firm entry on wages in unionised and non-unionised sectors, and on welfare. We find that a shift from autarky to free trade increases non-union wages and welfare, whereas the effect on union wages is ambiguous. We also show that partial deunionisation leads to higher wages in both unionised and non-unionised sectors, but only increases welfare when the proportion of unionised sectors is sufficiently low. Finally, wages in non-unionised sectors necessarily increase with firm entry, while the response of union wages and welfare depends on the trade regime.

Corruption and Trade in General Equilibrium

We use the HOSV model of trade to find out a link between corruption and the pattern of trade, not just its effect on the volume of trade. We prove that greater corruption in labor-abundant countries will restrict the volume of world trade while corrupt capital-abundant countries promote trade. This is caused by intermediaries who are engaged in mitigating the transaction cost of corruption. Relatively corrupt economy will export capital-intensive goods. However, relatively capital-abundant country will be worse off with increasing degree of corruption at home and abroad, whereas the labor-abundant country may gain from further corruption.

Market, Trade and Welfare in General Equilibrium

Market, Trade and Welfare in General Equilibrium

Trade and Gains from Trade Between Profit-maximizing and Labour-managed Countries with Imperfect Competition

This paper offers a theoretical analysis of trade and the gains from trade in general equilibrium under imperfect competition by assuming that all firms in one country are of the labour-managed type (maximizing the income of labour) while those in the other country are of the profit-maximizing type. Our main conclusion is that if the labour-managed country is larger than or equal to the profit-maximizing country, the profit-maximizing country exports the imperfectly competitive commodity and gains from trade while the labour-managed country exports the perfectly competitive commodity and may lose from trade.

Environment and Trade in General Equilibrium: Theory, Methodology, and Evidence: Discussion

The subtitle of this three-paper session-theory, methodology, and evidence-is particularly apt, since each paper deals primarily with one of the three items. The Copeland-Taylor paper is a theoretical contribution to the debate, Is free trade good or bad for the environment? The Espinosa-Smith paper, although it presents empirical results, is mainly a methodological contribution showing how to incorporate nonmarket information into a computable general equilibrium (CGE) model. Finally, the Beghin, Roland-Holst, and van der Mensbrugghe paper provides evidence in the form of simulation results of trade liberalization and emissions taxes

Currency, Trade, and Capital Flows in General Equilibrium

This paper studies currency, trade, and capital flows in a one-good general equilibrium exchange model with utility-maximizing individuals. The effects of both monetary and endowment shocks are examined. It is shown that both can cause trade and capital flows. The model is a two-country version of the twostate optimizing model used recently by LeRoy (1984a, 1984b) to study the effects of monetary and endowment shocks in a closed economy. Each country issues its own currency, real and nominal bonds, and equity shares. Each receives an endowment of a perishable consumption good. The demand for money is generated by entering real balances into the utility function as in Dornbusch and Mussa (1975), Calvo (1981), Liviatan (1981), Obstfeld (1981a, 1981b, 1982), Razin (1981), Stockman (1983), and Michener (1984). Each country holds both currencies, an assumption made only by Liviatan. Both monetary growth and endowments of the consumption