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Edited by William A. Kerr and James D. Gaisford
Chapter 5: Modeling Approaches to the Analysis of Trade Policy: Computable General Equilibrium and Gravity Models
Olena Ivus and Aaron Strong Introduction Gravity models and computable general equilibrium (CGE) models are the most commonly used analytical techniques to perform a quantitative analysis in the area of trade policy. These models provide a consistent economy-wide picture that can be very beneﬁcial to policy makers. Both CGE and gravity models have the advantages of general equilibrium approaches in examining a great variety of questions. In the partial equilibrium models of international trade the focus is on one sector of the economy with the crosssector eﬀects being disregarded. General equilibrium modeling, in turn, takes explicit account of the consequences that a policy change in one sector has on other sectors of the economy. The gravity model is a popular empirical approach to trade that has been used widely for analyzing the impact of diﬀerent trade policy issues on bilateral trade ﬂows between diﬀerent geographical entities. This model takes an ex-post approach to perform trade policy analysis. Gravity models measure the eﬀect on trade ﬂows of a past trade policy. By contrast, CGE modeling takes an ex-ante approach, which involves quantifying the future eﬀects of a new policy. In addition, gravity models only explain the pattern of bilateral trade and do not provide direct estimates of welfare costs. CGE models, on the other hand, are generally used to quantify the impact of a change in trade policy on countries’ welfare levels and the distribution of income across multi-country regions. The main goal of this...
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