A FREE TRADE AGREEMENT AMONG FORMER SOVIET REPUBLICS:
A COMPUTABLE GENERAL EQUILIBRIUM MODEL
Michael P. Barry
Michael P. Barry, J.D., an Associate Professor of Economics and Law at Mount St. Mary’s University (Emmitsburg, Maryland, the U.S.)
What would happen to the economies of the former Soviet Union if they finally implemented a full-fledged free trade agreement? How would this change sector output, GDP, prices, international trade, and the economic welfare of the nation? How would it affect the economies of the FSU’s other trading partners? This paper attempts to address these and other issues through the use of a computable general equilibrium model (CGE). The model is a large, multi-regional, multi-sectoral, multi-factor system of simultaneous equations. It introduces the “shock” of zero tariffs between all FSU’s trading partners, and solves for a new economic equilibrium. There are some political and practical obstacles to the completion of such a trade agreement, so this mathematical model in some ways is just a hypothetical experiment. But an analysis of trade effects can nonetheless be useful to any policymaker in the former Soviet space.
1. CGE Model for FSU Trade
How would a FSU free trade agreement change the FSU economies and those of the globe? This section will develop a computable general equilibrium model to quantify the macroeconomic effects of lowering all import tariffs between FSU trading partners to zero. The section is broken into several parts, including: (a) a background of CGE models; (b) the Global Trade Analysis Project (GTAP); (c) the structure of this paper’s model; (d) model results; (e) model limitations and future research.
1.1. Background of General Equilibrium Models
General equilibrium, a concept which dates back to Leon Walras (1834-1910), is a pillar of modern economic thought. General equilibrium recognizes that there are many markets in an economy, and that these markets all interact in complex ways with each other. In rough terms, everything depends on everything else. Demand for any one good depends on the prices of all other goods and on income. Income, in turn, depends on wages, profits, and rents, which depend on technology, factor supplies and production, the last of which, in its turn, depends on sales (i.e., demand). Prices depend on wages and profits and vice versa.
Computable General Equilibrium (CGE) modeling specifies all economic relationships in mathematical terms and puts them together in a form that allows the model to predict the change in variables such as prices, output and economic welfare resulting from a change in economic policies. To do this, the model requires information about technology (the inputs required to produce a unit of output), policies and consumer preferences. The key of………….