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Capturing NAFTA's impact with applied general equilibrium models

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Author Info

  • Patrick J. Kehoe
  • Timothy J. Kehoe

Abstract

We examine the results of four static applied general equilibrium (AGE) modeling teams' analyses of the effects of NAFTA. What they show is that Mexico's economy, because it's the smallest, will see the biggest NAFTA-produced increase in economic welfare: from 2 to 5 percent of GDP. The U.S. welfare increase will be small, around 0.1 percent of GDP; Canada will notice no welfare increase due to NAFTA. We then discuss two examples of dynamic phenomena—labor force adjustment and capital flows—which are likely to influence NAFTA's welfare impact, but that aren't easy to incorporate into static AGE models. Early results indicate that this is an important direction for future study.

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Bibliographic Info

Article provided by Federal Reserve Bank of Minneapolis in its journal Quarterly Review.

Volume (Year): (1994)
Issue (Month): Spr ()
Pages: 17-34

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Handle: RePEc:fip:fedmqr:y:1994:i:spr:p:17-34:n:v.18no.2

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Related research

Keywords: North American Free Trade Agreement;

References

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  1. Lucas, Robert E, Jr, 1990. "Why Doesn't Capital Flow from Rich to Poor Countries?," American Economic Review, American Economic Association, vol. 80(2), pages 92-96, May.
  2. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
  3. Topel, Robert H, 1991. "Specific Capital, Mobility, and Wages: Wages Rise with Job Seniority," Journal of Political Economy, University of Chicago Press, vol. 99(1), pages 145-76, February.
  4. David Cox & Richard Harris, 1983. "Trade Liberalization and Industrial Organization: Some Estimates for Canada," Working Papers 523, Queen's University, Department of Economics.
  5. Richard Harris, 1983. "Applied General Equilibrium Analysis of Small Open Economies with Scale Economies and Imperfect Competition," Working Papers 524, Queen's University, Department of Economics.
  6. Gary Clyde Hufbauer & Jeffrey J. Schott, 1992. "North American Free Trade: Issues and Recommendations," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 71.
  7. Davis, Steven J & Haltiwanger, John C, 1992. "Gross Job Creation, Gross Job Destruction, and Employment Reallocation," The Quarterly Journal of Economics, MIT Press, vol. 107(3), pages 819-63, August.
  8. Brown, D.K. & Deardorff, A.V. & Stern, R.M., 1991. "Some Estimates of a North American Free Trade Agreement," Working Papers 288, Research Seminar in International Economics, University of Michigan.
  9. Drusilla K. Brown & Robert M. Stern, 1989. "U.S.-Canada Bilateral Tariff Elimination: The Role of Product Differentiation and Market Structure," NBER Chapters, in: Trade Policies for International Competitiveness, pages 217-254 National Bureau of Economic Research, Inc.
  10. Hall, Robert E, 1982. "The Importance of Lifetime Jobs in the U.S. Economy," American Economic Review, American Economic Association, vol. 72(4), pages 716-24, September.
  11. Stern, R.M. & Deardorff, A.V. & Brown, D.K., 1992. "A US-Mexico-Canada Free Trade Agreement: Sectoral Employment Effects and Regional/Occupational Employment Realignments in the United States," Working Papers 315, Research Seminar in International Economics, University of Michigan.
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