Question

An Empirical Approach to the Small Initial Trade Share Problem in General Equilibrium Models."Kuiper and van Tongeren (2006).
Write down Major findings and objective of the study?

Answer 1

The research question that authors have attempted is based on CGE analyses of trade liberalization describe the effects of eliminating trade bathers on import quantities. The major-ity of these analyses assume an Armington import aggregation function. The "small share problem" is due to the scaling effect of the share parameter a in the Armington import demand equation: M Pm -P - CC - Q PQ where M is the import, Q is the composite commodity (the sum of imported and domestically produced varieties), PM and Po are the prices of the import and the composite commodity, respectively, and parameter p is related to the import substitution elasticity parameter. Parameter a is the initial quantity share of imports in the consumption of commodity Q. Its value is calculated during model calibration and does not change following a model experiment. Notice that if the initial import share is small, then even a large change in the relative price of the import, or a large increase in the size of the import substitution parameter, can result only in small changes in the import share of consumption. This scaling effect may lead to unrealistically small import quantity results in trade liberalization simulations that cause the import price to fall. Could a gravity model provide an empirical basis for changing the share parameters as part of trade liberalization experiment? What Ls the model Innovation? The researchers develop a gravity model to identify the role of trade barriers in bilateral trade flows. They use the gravity model to simulate trade liberalization and estimate changes in bilateral trade shares. Then, they modify their GTAP model to adjust the calibrated trade shares to those of the gravity model results as part of a trade liberalization experiment.