Individual economic agents in a macroeconomic model: UK companies in Cambridge MDM

This paper makes a case for disaggregating the company sector in economic policy modeling and reports the first attempt to construct projections for the U.K. company sector using individual company models. It outlines the disaggregated model and explores for each endogenous variable the type of improvement in modeling that disaggregation can offer. The scale of aggregation biases is demonstrated by comparing illustrative projections for the disaggregated model and for an aggregate counterpart model. These projections also suggest the areas of policy making to which the model can contribute.     

Rent seeking and the North-South terms of trade

In this paper results are reported for a series of counterfactual experiments with an eight- region numerical general equilibrium model of world trade, production, and welfare. In these analyses trade restrictions in the developing world are modeled as quantity constrained import licensing, which generates competitive rent-seeking behavior. Model experiments concentrate on the implications of differential factor endowment growth for the North-South terms of trade, and the effects of alternative trade policy changes in developing countries.     

Asset markets and foreign exchange intervention: A model of the Belgo-Luxemburg economic union

In this article a general formulation of government intervention policies in the foreign exchange market is integrated in the framework of an asset market model. The policy reaction function is based on a trade off between exchange rate and reserve stock fluctuations; constant exchange rates and a pure float are derived as limiting cases of the intervention schedule. An exchange rate equation is derived from the short run portfolio equilibrium of the model and is successfully tested using data for the Belgo-Luxemburg Economic Union (1967–1979). Our policy conclusions contrast the European Snake constraints for the Belgian Franc with Artus's findings (IMF Staff Papers XXIII(2), July 1976) for the leading DM.     

An international trade model to capture linkages among supply-constrained economies

The development of a country's domestic and international markets depends on its own actions as much as on those of its trading partners. The study of market linkages is thus vital for policy making. Borrowing from the conceptual framework of Leontief's input-output analysis and from the national accounts equation, this paper presents a new model to calculate multilateral trade multipliers while minimizing data requirements. The novelty of the approach consists in the column-wise (supply-oriented) normalization of trade as opposed to the row-wise (demand-oriented) normalization that prevails in the literature. The explanatory power of the model has been successfully tested on data that refer to 1973–1974. Divergence from reality inevitably reflects the great fluidity that characterized trade during that period. Although most successful when applied to trade among supply-oriented economies (such as those of socialist or developing countries), at present empirical tests have been run only for a handful of OECD and OPEC countries.     

The microeconomics of distribution: A simulation of the farm economy

A simulation model that incorporates both production and consumption behavior of farm households in Taiwan is presented. The model is used to analyze the effects of policy instruments (price supports, minimum wages, taxes, subsidies, demographic policies, and land and capital redistribution) on the aggregate values of the endogenous variables of the system—the supplies of output and labor, the demands of factors and consumption, income and expenditure—and their distribution among households. The model differs from other simulation models in that it is based on microsimulation, in which the joint distribution of individual household characteristics such as farm-specific prices, initial endowments of land and capital, and numbers of workers and dependents, is explicitly taken into account. As a result, the model is capable of capturing the distributional as well as aggregate impacts of policy changes.     

Adjustment costs in labour markets and the distributional effects of trade liberalization: Analytics and calculations for Vietnam

This paper explores the implications of different labour market adjustment formulations for the analysis of trade liberalization across different sectors and households in the Vietnamese economy using computable general equilibrium (CGE) models. The model is calibrated to a model admissible Vietnamese data set for 1997.We use five different adjustment cost treatments in analyzing the effects of trade liberalization in Vietnam. We compare simulation results from each and show how different treatments can significantly affect the distributional impacts of policy reforms, such as the trade liberalization. First, labour is treated as fully mobile across all sectors in the economy. Second, the sectors of economy are broken down into the two blocks of agricultural and industrial-service sectors and labour markets are treated as segmented by sector block. No mobility of labour between blocks is allowed while labour within each sector block remains fully mobile. The third is the same as the second, but movement within each agricultural and industrial-service sector block involves transactions costs. In the fourth, mobility of workers from the agricultural to industrial-service sectors and vice versa is possible with transactions costs. Finally, we calibrate the model with unemployment but no adjustment costs for labour reallocation to explore how model results differ in terms of adjustments in the labour market and welfare effects.Our results indicate significant differences in the impacts from trade liberalization across these cases. The redistributional impact of trade liberalization is sharper against poor rural households with segmented labour markets and with transactions costs, while aggregate efficiency gains are similar to no adjustment cost analyses. The conclusion is the choice of model structure for labour markets is crucially important for the perceived distributional impacts of trade liberalization.     

Trade and development in the world economy: Methodological features of Project DYNAMICO

The paper reports on the methodological features and early application of the model underlying the DYNAMICO Projects, which has been developed at the United Nations Secretariat to study the interaction between trade and development. In order to investigate alternative development strategies, scenarios are calculated year by year for the global economy and the ten regions covered in the model.Each year is represented by a block-angular linear programming problem, where the systemwide (or coupling) constraints represent the world market clearance conditions for nine tradable commodities. Each subblock of relations represents the economy of a given region. The Dantzig-Wolfe decomposition method is used to solve the system.Section 2 reviews the specifications of a typical regional subproblem. Each regional subproblem contains the following material balances; labor, land, and capital requirements; investment functions; the most important macroeconomic definitions; and several other restrictions to simulate policy constraints concerning both domestic and external economic activity.Decomposition methods may, in general, be viewed as resource-allocation procedures valuable to capture some of the essential features of decentralized decision-making. In the literature, two classes of such resource-allocation procedures have been proposed: primal (relying on quantity signals), and dual (relying on prices). Section 3 discusses some of the theory underlying the Dantzig-Wolfe method, which is a price-directive one.Section 4 describes in detail the particular solution method implemented in the model. At first, in a prelink phase, each regional subproblem is solved a number of times on the basis of     

Tariffs,the terms of trade,and national product differentiation

The assumption of national product differentiation is a common feature in many computable general equilibrium models currently used to evaluate trade policy. The results of these models tend to be dominated by changes in the terms of trade, rather than the efficiency effects of the policy concerned. In this paper we use a theoretical n-country general equilibrium trade model to evaluate how national product differentiation relates to the terms-of-trade effects of a tariff. We conclude that monopoly power implicit in national product differentiation is the source of the strong terms-of-trade effects in Armington-type models, and can be exercised with the imposition of a tariff. These results are independent of country size, thus yielding a nonzero optimal tariff even for a small country. Theoretical results are then illustrated using the importdisaggregated version of the Michigan model of world production and trade. We find that strong, tariff-induced terms-of-trade changes emerge over a wide range of import demand elasticities. These results suggest that the assumption of national product differentiation may prejudice the case in favor of maintaining existing levels of protection, and, therefore, may not be appropriate for commercial policy analysis.     

Policy modeling of foreign exchange rates

This paper is neither a complete survey of empirical work on exchange rate determination, nor a review of the ballooning volume of theoretical models. It is instead an attempt to classify the main alternative approaches to modeling exchange rates. I shall concentrate on approaches that can be used to assess the effects of alternative policies. There will be four further sections in the paper. The first three sections will each deal withthe structure, empirical support, and policy consequences of three main types of model: purchasing power parity models emphasizing the close and immediate relation of goods markets; interest rate parity models emphasizing the close and immediate international linkage of markets for financial assets; and structural balance-of-payments models that do not assume either of the above linkages to be so strong and immediate as to eliminate the other, and that hence require separate (but interdependent) modeling of trade and capital linkages in the determination of exchange rates. Each of these main categories has many rather distinct models within it, and some models are not easily classified into one of the three categories; I hope that the three-way split will nevertheless serve to make some distinctions that are important for policy modeling.In the final section I shall try to summarize the available model results that pertain to national and international policy choices under a system of more flexible exchange rates, and then to suggest where more or better model building might usefully increase the amount of information available to guide policy decisions.     

A dynamic-optimization model of foreign borrowing: A case study of Thailand

This article assesses alternative foreign-borrowing strategies for Thailand using a medium-term dynamic optimization model. The model has five sectors: rubber, other agriculture, manufacturing, services, and construction. All markets clear with endogenous domestic prices. The model solution is a set of annual borrowing and investment levels, which through a general-equilibrium system determine domestic output, trade flows, and consumption, and that are chosen so as to maximize welfare.This model is applied to an analysis of the historical strategy taken by Thailand between 1975 and 1981. We find that Thailand may indeed have overborrowed toward the end of the 1970s and attribute the divergence of the actual and the optimal borrowing paths partly to inaccurate expectations on the timing and duration of shocks and partly to government policies that distorted market forces.The analysis suggests that robust foreign-borrowing stratergies should be based on an understanding of the structure of the economy, its flexibility in adjusting to shocks, on expectations of future events, and on lender's behavior. The endogenous and simultaneous nature of the interactions of key macrovariables cannot be overemphasized. Thus, the borrowing strategy must be made consistent with fiscal, monetary, and commercial policies.     

Trade liberalization and factor prices: An application to the U.S. manufacturing sector

The effects of a trade policy on the prices of productive factors have important policy implications, particularly with regard to trade liberalization and protection. This paper examines the empirical evidence of the Stolper-Samuelson theorem for 16 major U.S. manufacturing industries. The theorem asserts that international trade reduces the prices of scarce productive factors and hence decreases their shares of income. The elasticities of prices of finished goods with respect to factor prices are estimated and then rearranged in the form of the row stochastic P-matrix in accordance with the proposition of Uekawa. The inverse of this matrix seems to confirm the weak version of the Stolper-Samuelson theorem.     

North-South relations: Alternative policy simulations for the world economy in the 1980s

This article makes projections of the world economy in the North-South context for the period 1981–1990 using a latest global version of a macroeconomic model named FUGI-GNEM type IV 011–62. The model classifies the world into 62 countries/regions, where the North-South interdependence is incorporated into an integral part of the world economy through international economic linkages. Based on alternative simulations, the author presents future images of the North-South interdependent world economy through changes in economic growth rates, employment, wages, prices, money supply, interest rates, public finance, trade, capital movement, international balance of payments, foreign exchange rates, etc., in each country or region. The model forecasts that the real economic growth of the developing countries as a whole in the 1980s will likely be around 4%–7% annual rate according to alternative policy scenarios.     

外商直接投资对广西出口竞争力影响的实证分析

通过外商直接投资对出口竞争力影响的效应分析,对广西FDI对出口竞争力进行了竞争实力与竞争潜力两方面的实证分析,即分别对国际市场占有率、出口促进、出口产品技术水平、TC指数、RCA指数、贸易创造指数、技术外溢效应等进行实证分析,提出了引入价值增值率更高的生产环节的外商投资,利用FDI培育内生技术能力的政策选择,形成贸易、外资与产业政策合力等对策建议,最大限度地利用FDI促进广西出口竞争力的发展。     

Computable general equilibrium models for trade policy analysis in developing countries: A survey

This paper surveys the contributions of computable general equilibrium (CGE) simulation models designed to quantify the implications of alternative trade policy scenarios in developing countries. The paper starts with a review of the basic structure of CGE models, using a one-sector model with product differentiation on the import and export side. The basic properties of CGE models are established and a series of applications to trade policy, internal-external balance and growth, and intertemporal issues are discussed.     

Modeling U.S.-Japan competition in semiconductors

This paper describes an analytical framework used to analyze Japanese-American competition in the market for computer memory devices. The nature of this competition has captured the attention of policy makers in both countries, as evidenced by recent trade disputes alleging Japanese firms have benefited from unfair government subsidies, lax antitrust policies, and restrictive home market practices. In this paper, we present a methodology that may be used to estimate the impact of some of these programs on the competitive structure of the United States market for dynamic random access memory devices (DRAMs). The model incorporates the nature of the DRAM manufacturing process (in which “learning curve” benefits are tremendously important), and portrays the worldwide DRAM market as one in which (1) geographic market segmentation is prevelant, (2) a limited number of suppliers compete, and (3) the products are imperfect substitutes. This situation matches well the situation found in the Semiconductor DRAM Market. The distinctive features of this approach are the detailed modeling of the impact of learning on the cost structure of the firm, and its framework for analyzing firm behavior in an imperfect market. Using this approach, we evaluate how a variety of Japanese government programs have affected the competitive position of their industry, and present our view on the major policy implications which emerge.     

Indian agricultural policy: An applied general equilibrium model

A ten-sector, sequential applied general equilibrium model is formulated, estimated, and stimulated for analyzing agricultural policy choices for India until year 2000. Ten groups of consumers (five of them rural), each with its own preferences and claims on output are recognized in the model, the groups distinguished by the range of their per capita household (real) consumption expenditure. The simulations compare: four policies with respect to the compulsory purchase and subsidized distribution to consumers of a limited amount of foodgrains and four foreign trade and aid scenarios. Procuring and freely distributing 100 kgs of grain per capita per year and financing the cost through additional taxation improves income distribution with no reduction in growth. On the other hand, the same distributional policy financed by reducing investment has a negative impact on growth.     

Commodity prices and the world distribution of income

Some advocates of a new international economic order recommend raising prices of commodities exported by developing countries as a means of reducing the inequality of world income distribution. A simulation model using commodity trade data and income distribution data for 68 industrial and developing countries examines this policy alternative. Initial data compilation reveals that internal inequality is as important as international: The world income share of the poorest 40% of people would be twice as high in the absence of intracountry inequality. Calculations using actual price experience in the “great inflation” of 1972–1975 show that despite the large relative price changes for some commodities (especially oil), these changes left the world size distribution of income virtually unchanged. Separate policy simulations show that even a quadrupling of the price of ali “equalizing” commodities (those mainly exported by LDCs) would leave the size distribution of world income practically unaltered (even under optimistic assumptions about intracountry distributional incidence), although some individual LDCs would gain. Increasing commodity prices therefore appears to be an ineffective means of increasing international equity, quite apart from questions about the feasibility of cartels or commodity agreements.     

A disaggregated model of world production and trade: An estimate of the impact of the Tokyo Round

We present in this paper a computational model of world production, trade, and employment that is disaggregated by country and sector and report on the application of the model to the changes in tariffs and quantifiable nontariff barriers negotiated in the Tokyo Round that was concluded in 1979. The model incorporates supply and demand functions and market-clearing conditions for 22 tradable industries, plus markets for 7 nontradable industries, in each of the 18 major industrialized countries and 16 major developing countries. The equations of the model are presented in the text and the explicit functional forms in an appendix. The implementation of the model is discussed briefly.Application of the model to the Tokyo Round suggested that there will be small but beneficial effects on trade, domestic prices, and economic welfare in practically all the major industrialized countries and in some of the major developing countries. Because many of the NTB codes negotiated in the Tokyo Round were stated in advisory terms, their impact cannot be evaluated unambiguously at present. Further, many existing NTBs of importance were exempted altogether from the negotiations. The Tokyò Round must be viewed accordingly as having dealt with a somewhat limited part of all interferences with trade.     

The experience of the EEC Eurolink Project in modeling bilateral trade linkage equations

Following the basic philosophical approach of the LINK Project, which links various national econometric models built in different countries, the Commission of the European Communities has succeeded in linking the full-size quarterly econometric models of the four major European countries. The Eurolink Project is being extended to cover the other EEC countries as well as the United States, Canada, and Japan. The results reported in this paper are part of this larger project which attempts to link the EEC member economies in a trade and capital flows econometric model and explain the transmission of interdependent economic fluctuations from country to country. In the present study, the interconnection between the various economies is represented by bilateral trade flows only. Flows of invisibles and of financial capital are not completely studied and are not yet ready to be included in this report.The theoretical structural model with its bilateral trade supply and demand functions and the technique employed for the construction of bilateral import and export price indices are presented. Estimation results are shown and discussed with emphasis on their use for the analysis of international trade and for policy decision making.