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Product differentiation and foreign trade in CGE models of small economies

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  • de Melo, Jaime
  • Robinson, Sherman

Abstract

In recent years, two classes of computable general equilibrium (CGE) trade models have been used to investigate external sector policies: single country and and multicountry trade models. The authors examine the treatment of exports and imports in recent single country CGE models of small economies. They present a simple, one sector analytical model that captures the major features of the multi sector counterpart used in applied models. They show that applying the same assumption about product differentiation to imports as to exports gives rise to a well behaved, price taking economy and normally shaped offer curves. They illustrate the one-sector model with a numerical example which shows the implications of the choice of weights used as a proxy for the domestic price index in computations of real exchange rate indices. The model also shows the role of foreign trade elasticities in the popular Australian model, with traded and nontraded goods. Trade substitution elasticities on the import side play a crucial role in determining the direction of change in real exchange rate during terms of trade perturbations.

Suggested Citation

  • de Melo, Jaime & Robinson, Sherman, 1989. "Product differentiation and foreign trade in CGE models of small economies," Policy Research Working Paper Series 144, The World Bank.
    • Handle: RePEc:wbk:wbrwps:144
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    References listed on IDEAS

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    1. Whalley, John & Yeung, Bernard, 1984. "External sector closing rules in applied general equilibrium models," Journal of International Economics, Elsevier, vol. 16(1-2), pages 123-138, February.
    2. Jones, Ronald W & Berglas, Eitan, 1977. "Import Demand and Export Supply: An Aggregation Theorem," American Economic Review, American Economic Association, vol. 67(2), pages 183-187, March.
    3. John Whalley, 1984. "Trade Liberalization among Major World Trading Areas," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262231204, December.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

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    2. Eduardo Haddad & Alexandre A. Porsse & Eduardo P. Ribeiro, 2006. "Modeling Interjurisdictional Tax Competition in a Federal System," ERSA conference papers ersa06p359, European Regional Science Association.
    3. Alexandre Porsse & Eduardo Haddad, 2005. "Tax incentives and economic effects - a general equilibrium approach," ERSA conference papers ersa05p733, European Regional Science Association.
    4. Garcia, Federico & Lanfranco, Bruno & Hareau, Guy G., 2009. "Rice Production in Uruguay: Technical Change Options under a General Equilibrium Framework," Conference papers 331839, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    5. van der Mensbrugghe, Dominique, 2013. "Modeling the Global Economy – Forward-Looking Scenarios for Agriculture," Handbook of Computable General Equilibrium Modeling, in: Peter B. Dixon & Dale Jorgenson (ed.), Handbook of Computable General Equilibrium Modeling, edition 1, volume 1, chapter 0, pages 933-994, Elsevier.
    6. Alexandre Porsse & Eduardo Haddad & Eduardo Ribeiro, 2005. "Economic Effects Of Regional Tax Incentives: A General Equilibrium Approach," Anais do XXXIII Encontro Nacional de Economia [Proceedings of the 33rd Brazilian Economics Meeting] 124, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
    7. Bussolo, Maurizio & De Hoyos, Rafael & Medvedev, Denis & van der Mensbrugghe, Dominique, 2008. "Global Climate Change and its Distributional Impacts," Conference papers 331731, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.

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