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Disaggregated Data and Trade Policy Analysis: The Value of Linking Partial and General Equilibrium Models

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  • Narayanan, Badri
  • Hertel, Thomas
  • Horridge, Mark

Abstract

Computable General Equilibrium (CGE) models are now routinely utilized for the evaluation of trade policy reforms, yet they are typically quite highly aggregated, which limits their usefulness to trade negotiators who are often interested in impacts at the tariff line. On the other hand, Partial Equilibrium (PE) models, which are typically used for analysis at disaggregate levels, deprive the researcher of the benefits of an economy-wide analysis, which is required to examine the overall impact of broad-based trade policy reforms. Therefore, a PE-GE, nested modeling framework has the prospect of offering an ideal tool for trade policy analysis. In this paper, we develop a PE model that captures international trade, domestic consumption and output, using Constant Elasticity of Transformation (CET) and Constant Elasticity of Substitution (CES) structures, market clearing conditions and price linkages, nested within the standard GTAP Model. In particular, we extend the welfare decomposition of Huff and Hertel (2001) to this PE-GE model in order to contrast the sources of welfare gain in PE and GE analyses. To illustrate the usefulness of this model, we examine the contentious issue of tariff liberalization in the Indian auto sector, using PE, GE and PE-GE models. Both the PE and PE-GE models show that the imports of Motorcycles and Automobiles change drastically with both unilateral and bilateral tariff liberalization by India, but the PE model does a poor job predicting the overall size and price level in the industry, post-liberalization. On the other hand, the GE model overestimates substitution between regional suppliers due to false competition and underestimates the welfare gain, due to the problem of tariff averaging in the aggregated model. These findings are shown to be robust to wide variation in model parameters. We conclude that the linked model is superior to both the GE and PE counterparts.

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Paper provided by Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University in its series GTAP Working Papers with number 3162.

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Date of creation: 2009
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Handle: RePEc:gta:workpp:3162

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Cited by:
  1. Bektasoglu, Beyhan & Urban, Kirsten & Brockmeier, Martina, 2011. "Effects of Aggregation and Model Structure on Model Linkages," 51st Annual Conference, Halle, Germany, September 28-30, 2011 114721, German Association of Agricultural Economists (GEWISOLA).
  2. Joseph Francois & Miriam Manchin & Hanna Norberg & Olga Pindyuk & Patrick Tomberger, 2013. "Reducing Transatlantic Barriers to Trade and Investment: An Economic Assessment," IIDE Discussion Papers 20130401, Institue for International and Development Economics.
  3. Brockmeier, Martina & Bektasoglu, Beyhan, 2014. "Model structure or data aggregation level: Which leads to greater bias of results?," Economic Modelling, Elsevier, vol. 38(C), pages 238-245.
  4. Acharya, Sanjaya & Hölscher, Jens & Perugini, Cristiano, 2012. "Trade liberalisation and inequalities in Nepal: A CGE analysis," Economic Modelling, Elsevier, vol. 29(6), pages 2543-2557.

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