Modelling trade flows

Modelling trade flows

trade flows

Literature on the analysis of trade flows

often refers to computable general

equilibrium (CGE) and gravity models.

The CGE models use detailed information

on the structures of selected economies

and policies, and integrate them in a

multi-country, multi-sector, “marketclearing”

framework with a sophisticated

representation of demand and supply

relations.

Market-clearing is the idea that markets

will eventually clear excess (supply) or

unmet demand. This approach is used for

predictions of the future effects of a set

of economic policies and enables a rich

analysis of (trade) liberalisation scenarios at

various levels.

In contrast to the gravity approach,

CGE analysis allows direct assessment

of welfare effects of trade reforms.

Each result can be traced back to

theoretical assumptions and the structural

characteristics of the economies analysed.

The gravity approach uses historical data

to study the statistical significance and

magnitude of relationships between trade

and other factors, including the effects of

(trade policies).

The basic version of the gravity model

(relates the volume of bilateral (trade

flows to the economic size of two trading

countries as well as to economic “distance”

as measured by various trade costs.

This approach can help in understanding

historical trends and in particular to

separate the impact of trade policy changes

from other factors affecting trade volumes.

But it is not directly useful for assessing

the welfare implications or distributional

aspects of (trade policy) changes (“winners

and losers” in the country concerned).

Incidentally, behind an expression like

analysis of trade flows” there lies a“

phenomenal amount of data collection and

processing. The gravity model analyses this

chapter draws on, by OECD economists

Kowalski and Shepherd, involved processing

1.5 million lines of data