An introduction to GTAP applications relevant to ESCAP analytical work in trade

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An introduction to GTAP applications relevant to
ESCAP analytical work in trade

• A series of information sharing sessions on
  knowledge acquired through individual training

Mia Mikic, TID
More information on www.gtap.agecon.purdue.edu/
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Overview on presentation

• Why opting for a general equilibrium analysis?
• applied / computable general equilibrium models
• Why GTAP?
• Uses for ESCAP analytical work

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Models

• Model is a stylized simplification of reality in
  which behavior is represented by variables and by
  assumptions about how they are determined and
  interact.
• They allow us to frame the analysis in such a way
  that we are able to think consistently and
  logically about complex issues, to work out how
  changes in an economic system matter, and
  (sometimes) to make predictions about economic
  performance.

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General equilibrium

• Old idea Walras (1874), Edgeworth (1881), Arrow
  and Debreu (1954)

A situation where all markets in an economy are
simultaneously in equilibrium, that is, where
prices and quantities do not change.
X
U

p
E
X1
Y
Y1
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Partial equilibrium

• Marshall (1890)
• Equality of supply and demand in only a subset
  of an economy's markets -- usually just one --
  taking variables from other markets as given.

p
S
e
p1
D
q
q1
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Evaluation of trade liberalization

• Partial equilibrium models were most commonly
  used (at least until relatively recently)
• Standard presentation for a so-called small
  country fiction

a
c
b
d
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So we opt for GE analysis for

• Theoretical consistency (Walras)
• Accounting consistency (no double-counting)
• Inter-industry effects (inter-country effects)
• Welfare analysis vs. prices/surpluses
• Perspective
• ?Better informed debate and policy analysis

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When not to use GE?

• Interest in one sector only
• Interest in introducing a very complex
  interpretation of one sector/industry
• Data not available
• Time is not available ?

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What is CGE /AGE analysis?
THEORY/ MODEL
POLICY/ SHOCK
DATA
IN
SOFTWARE
OUT
NEW DATA / SOLUTION
CONCLUSIONS
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GTAP

• Global Trade Analysis Project - Developed and
  coordinated by the Center for Global Trade
  Analysis, Purdue University
• Culture
• A global network of researchers and policymakers
  conducting quantitative analysis of international
  policy issues
• Collaboration among academia, public sector and
  private sectors worldwide
• A program of distance-plus-residential intensive
  training courses, at Purdue and outside
• An annual conference (11th in 2008)
• Thousands of GTAP-based applications available on
  website
• 24 consortium members supporting GTAP financially

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Data

• Database (standalone product)
• Detailed inter-industry flows (I-O tables)
• Trade flows (bilateral)
• Protection (bilateral from tariff line),
  supplementary protection data
• Energy-use data
• See more on https//www.gtap.agecon.purdue.edu/dat
  abases/v6/default.asp

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Model

• Current model GTAP ver 6.2a - family of models
  (standard-static, dynamic)
• Describes global economy
• It is applied GE model
• Same model structure for each region
• Links the economies through trade flows (and in
  some way investment)

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GTAP model (contd)

• 96 regions (v.6.2a) and over 100 in v.7 (2008)
• 57 sectors
• Each region balanced (BoP0)
• S-net IX-M trade balance
• World is balanced
• Global savingglobal net investment
• Total exportstotal imports
• Features
• Perfect competition and CRS
• Armington assumption
• Comparative static

• Non-standard features
• Demand from a CDE function
• Sluggish primary factors
• Regional household
• Global transport sector
• Global bank

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Policy/shocks/scenarios

• Trade liberalization (trade reform) policy
  changes by multiple players
• Important to set endogenous and exogenous
  variables right in synch with the chosen policy
  shock

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Research questions base for scenarios

• Impact of DDA globally or for a single economy
• Impact of DDA on preference erosion
• Impact of an expansion of an existing trading
  block (e.g. adding Japan to BIMSTEC)
• Impact of trade reform in presence of sensitive
  products
• Impact of trade reform when competition is not
  perfect
• Impact of trade reform when there is labour
  mobility
• Impact of trade reform on rates of growth
• Impact of trade reform on energy emissions

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Software

• GEMPACK
• RunGTAP
• AnalyseGE

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Numbers/Results

• RI-RO
• The results of simulations are only as good as
  the specifications of the models (including
  parameters) and the data that are fed into them
• Numbers that come out should only be used to give
  a sense of the order of magnitude that a change
  in policy can mean for economic welfare or trade
  (forecast or not?)
• Dynamic models estimate larger gains from trade
  reform

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Results

• Critical interpretation- using decomposition of
  welfare results
• Sensitivity analysis- changing the models
  parameters, specifications to determine whether
  the simulation results are significantly affected
• Ex-post validation needed to increase confidence
  in the numerical results (long term)

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Limitations/criticisms

• Quality of information /sensitivity of the
  results to assumptions do not warrant assertions
  of a degree of precision in simulations of the
  future
• Obscured important underlying relationships
• Data low quality/missing
• Responsiveness of demand and supply to price
  changes are not estimated well / not accurate
• Choices among scenarios and model specifications
  can imply very different results
• Little evidence of ex-post validation of past
  simulations