GTAP Resources: Frequently Asked Question Details

1. GTAP, like most other CGE models, is a real model with no money. Therefore there is no nominal exchange rate which can be directly linked to those observed in the foreign exchange markets.

2. However, GTAP does have a mechanism for restoring external balance after a shock. In particular, the return to primary factors in each region will adjust, either:

• (a) downward to promote exports and choke off import competition, or


• (b) upward to restrict exports and encourage imports.

Therefore, the relative price of primary factors across regions is a logical "real exchange rate" use. By way of example, I use the version of RunGTAP from the web and choose the following: - book3x3 version - NEWMRGE closure so that the numeraire is the average return to primary factors, world-wide - shock tms(food,usa,eu) = -10 so that I am reducing the bilateral tariff on food from USA to Eu - solution method: Gragg 2-4-6 Then I get the following results for the variable pfactor(r) which measures the change in each region-specific primary factor price index, relative to the global average pfactwld (which is the numeraire). pfactor %chng PreLev PostLev AbsChng USA 0.12837 1.00000 1.00128 0.00128 EU -0.066641.000000.99933 -0.00067 ROW -0.028781.000000.99971 -0.00029.

You can see that the relative price of primary factors in the USA rose to restore external balance. This is because, with savings and investment largely unaffected, the increased demand for USA exports creates a disequilibrium -- provided imports are also unchanged. To restore equilibrium we require a real appreciation of primary factor prices in USA. This is very effective in restoring external balance, since it works to reduce exports of other products (by raising their price) and it also works to increase imports of competing goods as domestic prices rise. Of course, the opposite must occur in the EU, where the increase in imports has created an external imbalance at initial levels of exports, savings and investment.