Mapping Trade to Household Budget Survey: a conversion framework for assessing the distributional impact of trade policies

The question of whether the gains from trade are equally distributed within countries is subject to a lively debate. In order to analyse the distributional effects of trade policy, this paper develops a novel framework to link the OECD's CGE trade model, METRO, with consumption expenditure data from household budget surveys. This allows for examining the effect of a wide range of trade policy scenarios on different household consumption baskets, and for estimating the exposure of different socio-economic groups, such as income groups, to trade-driven changes in the relative prices of consumption items. The objective of this paper is to describe a methodology to produce a concordance and transition matrix linking GTAP sectors to household survey classifications (COICOP specifically). The methodology is two-fold. First, a cross-walk to establish a [0,1] concordance table between COICOP and GTAP classifications is produced. This is achieved by linking together multiple correspondence tables between COICOP and a number of different product classifications. Second, a transition matrix to convert changes in the prices of GTAP categories to COICOP categories is built. Because there is not always a one-to-one mapping between GTAP and COICOP classifications, the matrix is necessary. The transition matrix gives the extent to which the prices of COICOP items (for example, Meat as opposed to Animal drawn vehicles) change following a given price change of its associated GTAP sector (i.e., cmt-bovine meat). A mapping methodology is an important pre-requisite for investigating research questions concerning the influence of household behaviour changes on trade, as well as trade developments and policy on household welfare. The paper illustrates the mapping of trade policy induced price changes into household expenditures by conducting stylized tariff simulations with METRO and translating those into household expenditures by income decile for selected EU countries.