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General Equilibrium Trade Policy Analysis with Structural Gravity

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  • Mario Larch
  • Yoto V. Yotov

Abstract

The objective of this manuscript is to serve as a practical guide for evaluation of the general equilibrium (GE) effects of trade policy using the structural gravity model. We try to achieve this objective in four steps. First, we focus on the original Armington-CES gravity model, as a representative framework for a large class of GE models, to offer a deep analysis of the structural relationships underlying the general equilibrium gravity system, and how they can be exploited to make trade policy inferences. Second, we present and discuss a series of indexes that can be used to summarize the GE effects of trade policy. Third, we summarize the standard procedures to perform counterfactual analysis with the gravity model, and we outline recent methods to obtain theory-consistent GE effects of trade policy with a simple estimation procedure that can be performed in any statistical software package capable of estimating a poisson model (e.g. Stata). Finally, we demonstrate how gravity can be integrated with a broader class of general equilibrium models by nesting the Armington-CES model within a dynamic production superstructure with capital accumulation.

Suggested Citation

  • Mario Larch & Yoto V. Yotov, 2016. "General Equilibrium Trade Policy Analysis with Structural Gravity," CESifo Working Paper Series 6020, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_6020
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    Citations

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    Cited by:

    1. Shadat Hossain, 2018. "SAFTA and AFTA: a comparative welfare analysis of two regional trade agreements," Journal of Economic Structures, Springer;Pan-Pacific Association of Input-Output Studies (PAPAIOS), vol. 7(1), pages 1-27, December.
    2. Heid, Benedikt & Larch, Mario & Yotov, Yoto, 2017. "Estimating the Effects of Non-discriminatory Trade Policies within Structural Gravity Models," School of Economics Working Paper Series 2017-10, LeBow College of Business, Drexel University.
    3. Harald Oberhofer & Michael Pfaffermayr & Richard Sellner, 2018. "Revisiting Time as a Trade Barrier: Evidence from a Panel Structural Gravity Model," CESifo Working Paper Series 7426, CESifo Group Munich.
    4. Iliev, Dragomir & Stefanov, Galin & Yotov, Yoto, 2016. "Estimating Bulgaria’S Trade Borders With The Eu An Application Of The Empirical Gravity Model Of Trade," Business Management, D. A. Tsenov Academy of Economics, Svishtov, Bulgaria, issue 4, pages 1-3.
    5. Borchert, Ingo & Yotov, Yoto V., 2017. "Distance, globalization, and international trade," Economics Letters, Elsevier, vol. 153(C), pages 32-38.
    6. Scott L. Baier & Amanda Kerr & Yoto V. Yotov, 2018. "Gravity, distance, and international trade," Chapters, in: Bruce A. Blonigen & Wesley W. Wilson (ed.), Handbook of International Trade and Transportation, chapter 2, pages 15-78, Edward Elgar Publishing.
    7. Stefan Borsky & Andrea Leiter & Michael Pfaffermayr, 2018. "Product quality and sustainability: The effect of international environmental agreements on bilateral trade," The World Economy, Wiley Blackwell, vol. 41(11), pages 3098-3129, November.
    8. Mori, Tomoya & Wrona, Jens, 2018. "Inter-city trade," DICE Discussion Papers 298, University of Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    9. Agnosteva, Delina E. & Anderson, James E. & Yotov, Yoto V., 2019. "Intra-national trade costs: Assaying regional frictions," European Economic Review, Elsevier, vol. 112(C), pages 32-50.
    10. Baier, Scott L. & Yotov, Yoto V. & Zylkin, Thomas, 2019. "On the widely differing effects of free trade agreements: Lessons from twenty years of trade integration," Journal of International Economics, Elsevier, vol. 116(C), pages 206-226.
    11. Piermartini, Roberta & Yotov, Yoto, 2016. "Estimating Trade Policy Effects with Structural Gravity," School of Economics Working Paper Series 2016-10, LeBow College of Business, Drexel University.
    12. Steven Brakman & Harry Garretsen & Tristan Kohl, 2018. "Consequences of Brexit and options for a ‘Global Britain’," Papers in Regional Science, Wiley Blackwell, vol. 97(1), pages 55-72, March.
    13. Baier, Scott L. & Yotov, Yoto V. & Zylkin, Thomas, 2019. "On the widely differing effects of free trade agreements: Lessons from twenty years of trade integration," Journal of International Economics, Elsevier, vol. 116(C), pages 206-226.

    More about this item

    Keywords

    structural gravity; trade policy; general equilibrium analysis;

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions

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