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Capturing NAFTA's impact with applied general equilibrium models

  • Patrick J. Kehoe
  • Timothy J. Kehoe

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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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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  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. Harris, Richard, 1984. "Applied General Equilibrium Analysis of Small Open Economies with Scale Economies and Imperfect Competition," American Economic Review, American Economic Association, vol. 74(5), pages 1016-32, December.
  4. Robert H. Topel, 1990. "Specific Capital, Mobility, and Wages: Wages Rise with Job Seniority," NBER Working Papers 3294, National Bureau of Economic Research, Inc.
  5. Steve J. Davis & John Haltiwanger, 1991. "Gross Job Creation, Gross Job Destruction and Employment Reallocation," NBER Working Papers 3728, National Bureau of Economic Research, Inc.
  6. Robert E. Hall, 1984. "The Importance of Lifetime Jobs in the U.S. Economy," NBER Working Papers 0560, National Bureau of Economic Research, Inc.
  7. 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.
  8. Brown, D.K. & Stern, R.M., 1988. "U.S.-Canada Bilateral Tariff Elimination: The Role Of Product Differentiation And Market Structure," Working Papers 227, Research Seminar in International Economics, University of Michigan.
  9. Cox, David & Harris, Richard, 1985. "Trade Liberalization and Industrial Organization: Some Estimates for Canada," Journal of Political Economy, University of Chicago Press, vol. 93(1), pages 115-45, February.
  10. 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.
  11. 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, March.
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