Long Run Simulations With GTAP: Illustrative Results from APEC Trade Liberalisation

Abstract

In static applied general equilibrium models, the exogenous/endogenous split between variables (or closure) is used to infer the time frame over which the effects of a shock are simulated. This paper introduces a long-run closure for the GTAP model (Hertel and Tsigas, 1997) and uses this closure to simulate and compare the short-run and long-run effects of Asia-Pacific trade liberalisation. The approach explored here incorporates some relatively minor changes to existing GTAP theory in order to define a steady state in which growth rates of all real variables are uniform. Such uniformity must apply in the initial database (as well as in the post-shock solution). So to implement the new long run in GTAP a new initial database must first be created. Details concerning the creation of the new database are given, and results under the new approach are compared with those obtained under the old. The emphasis of this paper is on the development of a long-run closure in which the percentage change form equations of the model and the relationships between the levels variables in the GTAP database are consistent. Further research is required into these types of long-run closures to incorporate changes in ownership of capital to ensure that changes in welfare are adequately modelled. In the results reported here, GDP is not a useful guide to national welfare. The long-run closures introduced here are also compared with another comparative static long-run closure developed for GTAP by Francois, MacDonald and Nordström (1996). Technical Paper Number 9 can be downloaded in PDF format. To print this you will need the Adobe Acrobat Reader. For those interested in replicating the results in this technical paper, an associated zip file can be downloaded. The zip file includes a readme file with detailed instructions.