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Modelling of foreign trade in applied general equilibrium models: theoretical approaches and sensitivity analysis with the GEM-E3 model

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  • Schmidt, Tobias F. N.
  • Koschel, Henrike
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    Abstract

    The specification of the world closure, i.e. the way of closing the domestic economy model by incorporating the external sector, is a crucial component for those models in which production and consumption is not specified endogenously for all countries. This paper looks explicitly at the assumptions concerning the trade behaviour of the rest of the world that can be found in literature and in empirical applications, such as the GEM-E3 General Equilibrium Model for the EU. Starting from a description of the closure rule in the actual GEM-E3 model version, two main changes in the foreign trade specification are proposed and tested using an EU-wide ecological tax reform scenario. The first change refers to the rest of the world?s export supply function in which a constant finite price elasticity is introduced. The second change concerns the rest of the world?s import demand function in which an activity variable is incorporated. In summary, the impact in terms of economic welfare and changes in macroeconomic variables is noteworthy for the former case while no substantial changes could be observed for the latter case. Additionally, the sensitivity of the GEM-E3 model to variations in key parameter values such as the upper-level Armington elasticity are analysed. Results indicate that the model can be interpreted as quite robust to parameter changes. --

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    Paper provided by ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with number 98-08.

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    Date of creation: 1998
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    Handle: RePEc:zbw:zewdip:5181

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    1. Shoven,John B. & Whalley,John, 1992. "Applying General Equilibrium," Cambridge Books, Cambridge University Press, number 9780521319867, April.
    2. W.E. Diewert, 1986. "Export Supply and Import Demand Functions: A Production Theory Approach," NBER Working Papers 2011, National Bureau of Economic Research, Inc.
    3. Ulrich R. Kohli, 1982. "Relative Price Effects and the Demand for Imports," Canadian Journal of Economics, Canadian Economics Association, vol. 15(2), pages 205-19, May.
    4. Brown, Drusilla K., 1987. "Tariffs, the terms of trade, and national product differentiation," Journal of Policy Modeling, Elsevier, vol. 9(3), pages 503-526.
    5. Whalley, John & Yeung, Bernard, 1984. "External sector closing rules in applied general equilibrium models," Journal of International Economics, Elsevier, vol. 16(1-2), pages 123-138, February.
    6. Deardorff, Alan V. & Stern, Robert M., 1981. "A disaggregated model of world production and trade: An estimate of the impact of the Tokyo Round," Journal of Policy Modeling, Elsevier, vol. 3(2), pages 127-152, May.
    7. Clinton R. Shiells & Kenneth A. Reinert, 1993. "Armington Models and Terms-of-Trade Effects: Some Econometric Evidence for North America," Canadian Journal of Economics, Canadian Economics Association, vol. 26(2), pages 299-316, May.
    8. Conrad, Klaus & Schmidt, Tobias F. N., 1997. "Double dividend of climate protection and the role of international policy coordination in the EU: an applied general equilibrium analysis with the GEM-E3 model," ZEW Discussion Papers 97-26, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    9. Harrison, Glenn W & Rutherford, Thomas F & Wooton, Ian, 1991. "An Empirical Database for a General Equilibrium Model of the European Communities," Empirical Economics, Springer, vol. 16(1), pages 95-120.
    10. John Whalley, 1984. "Trade Liberalization among Major World Trading Areas," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262231204, December.
    11. Shoven, John B & Whalley, John, 1984. "Applied General-Equilibrium Models of Taxation and International Trade: An Introduction and Survey," Journal of Economic Literature, American Economic Association, vol. 22(3), pages 1007-51, September.
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    Cited by:
    1. Koschel, Henrike, 2000. "Substitution elasticities between capital, labour, material, electricity and fossil fuels in German producing and service sectors," ZEW Discussion Papers 00-31, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.

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