Calibrating a CGE model with NTBs that Incorporates Standard Models of Modern Trade Theory

Bekkers, Eddy Henricus; Francois, Joseph (July 2015). Calibrating a CGE model with NTBs that Incorporates Standard Models of Modern Trade Theory Bern: World Trade Institute

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We propose a way to incorporate NTBs for the four workhorse models of the modern trade literature in computable general equilibrium models (CGEs). CGE models feature intermediate linkages and thus allow us to study global value chains (GVCs). We show that the Ethier-Krugman monopolistic competition model, the Melitz firm heterogeneity model and the Eaton and Kortum model can be defined as an Armington model with generalized marginal costs, generalized trade costs and a demand externality. As already known in the literature in both the Ethier-Krugman model and the Melitz model generalized marginal costs are a function of the amount of factor input bundles. In the Melitz model generalized marginal costs are also a function of the price of the factor input bundles. Lower factor prices raise the number of firms that can enter the market profitably (extensive margin), reducing generalized marginal costs of a representative firm. For the same reason the Melitz model features a demand externality: in a larger market more firms can enter. We implement the different models in a CGE setting with multiple sectors, intermediate linkages, non-homothetic preferences and detailed data on trade costs. We find the largest welfare effects from trade cost reductions in the Melitz model. We also employ the Melitz model to mimic changes in Non tariff Barriers (NTBs) with a fixed cost-character by analysing the effect of changes in fixed trade costs. While we work here with a model calibrated to the GTAP database, the methods developed can also be applied to CGE models based on the WIOD database.

Item Type:

Working Paper

Division/Institute:

03 Faculty of Business, Economics and Social Sciences > Other Institutions > Teaching Staff, Faculty of Business, Economics and Social Sciences
02 Faculty of Law > Department of Economic Law > World Trade Institute
10 Strategic Research Centers > World Trade Institute

02 Faculty of Law > Department of Economic Law > NCCR International Trade Regulation

UniBE Contributor:

Bekkers, Eddy Henricus and Francois, Joseph

Subjects:

300 Social sciences, sociology & anthropology > 340 Law
300 Social sciences, sociology & anthropology > 380 Commerce, communications & transportation
300 Social sciences, sociology & anthropology > 330 Economics

Publisher:

World Trade Institute

Projects:

[UNSPECIFIED] PRONTO

Language:

English

Submitter:

Rebecca Anne Gilgen

Date Deposited:

17 Jun 2016 15:22

Last Modified:

31 May 2017 14:16

Related URLs:

JEL Classification:

F12, F14

BORIS DOI:

10.7892/boris.83773

URI:

https://boris.unibe.ch/id/eprint/83773

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