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A Nested PE/GE Model for GTAP: Simulating the Disaggregated Impacts of Tariff-Liberalization on Automotive Industry in India

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  • Narayanan, Badri
  • Hertel, Thomas W.
  • Horridge, J. Mark

Abstract

Given that the General Equilibrium (GE) models such as GTAP are highly aggregated, it is difficult to capture the tariff and trade-flow variations at disaggregate levels in these models. On the other hand, Partial Equilibrium (PE) models, which can be used for analysis at disaggregate levels, deprive the researcher of the benefits of an economy-wide analysis, which are crucial to examine trade policy impacts. Therefore, a CGE framework that is nested with a Partial Equilibrium model is an ideal tool to carry out trade policy analysis at disaggregated levels. We develop a Partial Equilibrium model in this paper, using some CET and CES nests, market clearing conditions and price linkages and nest it within the standard GTAP model, calling it a PE-GE model. The primary advantage of this new work is that it is undertaken in conjunction with the standard GTAP model, thereby making it readily available to users of that model, along with all of the decomposition tools that have been developed for the standard model. . In particular, we extend the welfare decomposition of Huff and Hertel (2001) to this model in order to investigate the sources of welfare gain in this integrated, trade modeling framework. To illustrate the usefulness of this model, we examine the contentious issue of tariff-liberalization in Indian auto sector, using PE, GE and PE-GE models. Both the PE and the linked model show that the imports of Motorcycles and Automobiles change drastically with a unilateral and complete tariff-liberalization in the auto sector by India. While the PE and PE-GE models show strikingly diverse results across the subsectors of the Indian auto industry, which cannot be captured by the GE model, the PE model does a poor job predicting the overall size and price level in the industry, post-liberalization. Thus, we find that the linked model is superior to the GE model in terms of disaggregated impact-evaluation and to the PE model in terms of endogenous determination of aggregate supply and demand. In summary, there is considerable value in linking PE and GE models.

Suggested Citation

  • Narayanan, Badri & Hertel, Thomas W. & Horridge, J. Mark, 2008. "A Nested PE/GE Model for GTAP: Simulating the Disaggregated Impacts of Tariff-Liberalization on Automotive Industry in India," Conference papers 331716, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    • Handle: RePEc:ags:pugtwp:331716
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    References listed on IDEAS

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    1. Thomlas W. Hertel & Paul V. Preckel & Marinos E. Tsigas & Everett B. Peterson & Yves Surry, 1991. "Implicit additivity as a strategy for restricting the parameter space in Computable General Equilibrium Models," Post-Print hal-01606308, HAL.
    2. Brueckner, Jan K & Whalen, W Tom, 2000. "The Price Effects of International Airline Alliances," Journal of Law and Economics, University of Chicago Press, vol. 43(2), pages 503-545, October.
    3. Hertel, Thomas, 1997. "Global Trade Analysis: Modeling and applications," GTAP Books, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University, number 7685, December.
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