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Published online by Cambridge University Press: 11 December 2020
In this chapter, we present the building blocks for trade policy analysis using a computable general equilibrium (CGE) model. We begin by reviewing the trade data in the Social Accounting Matrix (SAM). Next, we introduce two concepts, the real exchange rate and terms of trade, and explain how they are represented in standard CGE models. We then focus on trade theory as we simulate and interpret the results of two types of shocks: a change in factor endowments that change comparative advantage, and a change in world prices that changes industry structure, trade, and factor returns. We study an example of “Dutch Disease,” a problem that illustrates the links between a change in world prices, the real exchange rate, and industry structure. We conclude with an explanation of the role of trade margin costs in international trade.
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