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A Ricardian Trade Structure in CGE: Modeling Eaton-Kortum Based Trade with GTAP

Author

Listed:
  • Eddy Bekkers
  • Erwin Corong
  • Joseph Francois
  • Hugo Rojas-Romagosa

Abstract

We develop an Eaton-Kortum based calibrated computational model, incorporating the basic structure of the GTAP version 7 model and database. The underlying trade and associated gravity equations are modified from a standard Armington structure with love of variety by country of origin to an Eaton-Kortum structure with comparative advantage differences within sectors. We describe the theory and model code changes necessary for implementation. We also link the underlying theory to the appropriate estimating equations for gravity estimation of the trade parameters. As an application, we then compare the simulation results derived from GTAP-type models with both Armington and Eaton-Kortum specifications. The impact of trade policy experiments on real income is very similar with marginal differences being driven by the transportation sector. The terms of trade impact of tariffs is not uniformly larger in Eaton-Kortum relative to the Armington specification. Finally, the impact of trade cost changes on the volume of trade is smaller in the Eaton-Kortum specification than in the Armington specification due to the identical-price-by-source-country property in the former.

Suggested Citation

  • Eddy Bekkers & Erwin Corong & Joseph Francois & Hugo Rojas-Romagosa, 2023. "A Ricardian Trade Structure in CGE: Modeling Eaton-Kortum Based Trade with GTAP," Journal of Global Economic Analysis, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University, vol. 8(2), pages 1-59, December.
    • Handle: RePEc:gta:jnlgea:v:8:y:2023:i:2:p:1-59
    DOI: https://doi.org/10.21642/JGEA.080201AF
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