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GTAP Resources: Resource Display

GTAP Resource #4509

"Factor Market Flexibility and the Implications of Trade Policy Reforms"
by McDonald, Scott, Karen Thierfelder and Terrie Walmsley

Analyses of trade policy reforms between developed and developing regions using global CGE models often conclude that while the absolute gains for developed economies outweigh the absolute gains for developing countries the relative gains for developing countries are larger. However analyses of the results typically demonstrate that the extent of structural change in developing countries is many times greater than in developed economies; in previous studies the authors have found that the proportions of factors reallocated to different activities in developing economies can be in excess of one hundred times the proportions reallocated in developed economies. Moreover explorations of the properties of these simulation exercises demonstrate that the factor reallocations are often a critical determinant of the results; for instance if factor use by activities is fixed, an extreme assumption, then typically there are no gains in developing economies.

In the majority of global CGE models it is commonly assumed that factors are perfectly mobile across activities irrespective of whether full employment or excess supplies of factors are assumed. Such an assumption implicitly assumes that each factor is perfectly homogenous and that differences in the marginal productivities of a factor across activities are solely attributable to activity specific differences. Consequently factors are assumed to be perfectly mobile and reallocations across activities are costless. Furthermore it is assumed that factors in different segments, e.g., skilled and unskilled labour, cannot be reallocated across segments. Arguably these assumptions are relatively poor representations of the operation of actual labour markets.

An alternative assumption, used in the GTAP model among others, is that factor reallocations are ‘sluggish’ and that constant elasticity of transformation (CET) functions control factor reallocations: most frequently it is used for land and the authors know of no c...

Resource Details (Export Citation) GTAP Keywords
Category: 2014 Conference Paper
Status: Published
By/In: Presented at the 17th Annual Conference on Global Economic Analysis, Dakar, Senegal
Date: 2014
Created: Thierfelder, K. (4/15/2014)
Updated: Thierfelder, K. (4/15/2014)
Visits: 2,489
- Labor market issues
- Migration
- Multilateral trade negotiations
- Africa (Southern)

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