Evaluating a Trade Policy Using a Revealed Preference Approach

This study develops an empirical method to test the effect of North American Free Trade Agreement (NAFTA ) on U.S. welfare. Models developed so far under an ex-ante approach are mostly based on utility function assumptions, which are hard to meet. These models also have stringent data requirements. On the other hand, the models under the Revealed Preference approach as derived by Ohyama and others are simple to use, avoid the need of using a utility function, and require less information. However, the approach does not establish a causal relationship between a trade reform policy and its effect on a country’s welfare. Also, it only compares two points in time: one before the trade reform and the other after the reform. Therefore, it does not provide a region of acceptance or rejection be able to be empirically tested. This study overcomes those problems, establishes a causal relationship between NAFTA and its effect on U.S. welfare, and develops a statistically testable model to test the effect. The study finds the evidence that U. S. welfare has improved due to NAFTA . This result has also been tested for its robustness employing «The Intervention Analysis» approach.