Dynamics and baseline (Outdated)

Static comparative framework

MIRAGE model can be used in a standard static comparative framework. In this case, investment is not taken into account and all stock of factors remain fixed. The shock modelled lead to a steady state representing the final equilibrium state in a short-, mid-, or long term approach depending on modelling assumptions. Considering the default assumptions of the current static model (adjustment on most capital markets), it appears reasonable to consider changes as long-run adjustment on the base of reference year structure (growth of total factor supply is not taken into account).

Recursive dynamics framework

Adapting to a trade policy shock is neither immediate nor costless. Dynamics are thus useful, in order to be able to study the corresponding adjustment period, i.e. the short- and medium-run impacts.

The model's dynamics is exclusively of a sequential nature: the equilibrium can be solved successively for each period. Time span can be freely chosen, usually around 15 to 20 years. Except for capital, the growth rate of production factors is set exogenously and the technical progress is calibrated in order to fit GDP forecast.

Factor evolution

At each period, labour, land and the number of varieties adjust instantaneously to match the objectives assumed in the model. By contrast, capital stocks only adjust through investment, so that rates of returns vary across sectors after the base year. Even though the model does not include any explicit adjustment cost, capital allocation may become strongly unoptimal in the case of a strong shock applied to the economy. Then, the relative rigidity of the capital distribution across sectors induces implicit adjustment costs, as compared to what comes out of a perfect capital mobility assumption.

Debate on dynamics effect of trade policies

In addition, a number of effects are dynamic, in the sense that they are intrinsically linked to an accumulation or evolution process. Such effects are difficult to take into account in a static framework. They are mainly twofold:

  • trade policy may modify the capital stock in the economy, through its impact on income or on the savings rate (see e.g. (Richard Baldwin, 1989));
  • it may influence human capital and technology.

Each of these two kinds of effects is likely to reach far higher orders of magnitude (for gains as well as for losses) than static effects, as evidenced for example by the results of (Richard Baldwin, 1989)(Richard E Baldwin, 1992)) or of (Joseph F Francois, Bradley McDonald, Hakan Nordström, 1995) concerning capital accumulation, and those of (Richard E Baldwin, Rikard Forslid, 1999) as to introducing a technological externality linked to trade openness.

Empirical studies do not allow a definitive and robust conclusion to be reached about the existence of such growth effects in general. In this context, a cautious approach is necessary and no technological externality linked to trade is introduced in MIRAGE. This also explains why the savings rate is assumed to be constant over time in each region. Note, however, that capital accumulation is still influenced by income changes, that are proportionately transmitted to savings, and by the net balance of FDIs, which can be affected by the trade policy scenario.

In order to compute more precisely the effects of trade policy changes, a baseline has been constructed for the model. Basically, population and GDP projections are used to compute the trajectory of the technological progress in this baseline. To determine this parameter, other data are taken as exogenous.

Labour evolution

The initial levels of skilled and unskilled labour force in each region of the model are those of the GTAP database. The structure of the labour force (ratio of skilled to unskilled) is assumed to be constant over time as default for all regions. The growth rate of the labour force in each region is taken from the ILO projections of population.

Natural resources

Natural resources stocks are considered in the standard version as fixed over time. However, scenarios focused on energy policy issues can be refined by using exogenous prices path and computing associated depletion rate of oil and gas resources in the world.

Deforestation and fishing resource depletion can be introduced following observed trend but are not present in the core version of the model.

GDP and productivity

The annual growth of GDP in each region is taken from the World Bank projections. An annual growth of Total Factor Productivities (TFPs) is next computed endogenously by country. The figures are then used as exogenous reference variables when running simulations scenarios.

The pre-experiment scenario incorporates all trade policy measures that occurred in the past but that were not taken into account in the reference year.

The main topic of trade policy to take into account is the end of the Agreement on Textile and Clothing that granted a waiver to developed countries to maintain importation quotas on textile and clothing products till 2005. These constraints are to be removed in the baseline.

1. ^ a b Richard Baldwin, 1989. The growth effects of 1992. Economic Policy, 4, Oxford University Press Oxford, UK, pp.247–281.
2. ^ Richard E Baldwin, 1992. Measurable dynamic gains from trade. Journal of Political Economy, 100, The University of Chicago Press, pp.162–174.
3. ^ Joseph F Francois, Bradley McDonald, Hakan Nordström, 1995. Assessing the Uruguay round. World Bank Discussion Papers, INOR PUBLICATIES, pp.117–214.
4. ^ Richard E Baldwin, Rikard Forslid, 1999. Putting growth effects in computable equilibrium trade models. Dynamic issues in applied commercial policy analysis, pp.44–84.