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GTAP Resource #1538

"Armington Elasticities and Terms of Trade Effects in Global CGE Models"
by Zhang, Xiao-Guang

Armington substitution elasticities are a common feature in many global CGE models that are widely used for trade policy analysis. As a result, these models tend to generate the simulation results that are influenced, to a large extent, by the terms of trade effect. A common wisdom among modellers has been that increasing Armington elasticities will reduce terms of trade effects. However, the relationship between Armington elasticities and terms of trade effects, resulted from a trade policy change, is far more complicated than what is commonly believed.
In this paper, we first use a series of simplified theoretical general equilibrium models to demonstrate how different settings of Armington elasticities may affect the terms of trade of a country that introduce a tariff on its imports. These models are also simulated with some hypothetical data to quantify the effects of Armington elasticities on terms of trade. The results from the theoretical model are then tested on a more realistic CGE model of the world economy, the GTAP model. The results from the two models are compared, and the differences between the two are further explored.
The results from this paper may shed some new light on the nature of Armington elasticites in global CGE models and the likely impact they may have on the simulation results, in general, and on terms of trade effects, in particular.

Resource Details (Export Citation) GTAP Keywords
Category: 2004 Conference Paper
Status: Published
By/In: Presented at the 7th Annual Conference on Global Economic Analysis, Washington DC, USA
Date: 2004
Created: Zhang, X. (5/7/2004)
Updated: Zhang, X. (2/4/2005)
Visits: 4,232
No keywords have been specified.

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