trade are measured as well on aggregate output and welfare levels. For recipient economies in particular, three major aspects of FDI are replicated. Those are: output expansion effect due to increase in capital stock; productivity increase due to technology transfer attached to FDI flows; and an increase in domestic savings/investment due to FDI's cofinance effects. In Japan, a donor country, we observe a decrease in capital stock and output, an increase in returns to domestic investment, an improving terms of trade if technology is not transferred, and a deteriorating terms of trade if technology is transferred. Under the assumption of free capital movement, an area's rate of return on capital increases; this, in turn, increases the area's capital stock and output. Thus, the analyses in this chapter show that FDI transactions are a positive-sum game, not a zero-sum game.

In Chapter 5, we apply the GTAP model to the area of regional trading arrangement (RTA) under the ongoing process of globalization. Is APEC conducive to the MFN-based free world? Is membership in a South-South or a North-South RTA beneficial to developing countries? Are the South's new motives for RTA conducive to welfare gains? Analyses in this chapter are geared to shed light on these prevailing questions. Simulations conducted for the evolution of APEC show that APEC seems to have its own internal force toward the open world. Adding members should generally benefit the existing members. Analyses show, however, that membership in an RTA, even a large North-South RTA such as APEC, does not guarantee welfare gains for the developing countries. From the viewpoint of the developing countries, complementary domestic and border reforms supported by the new motives for RTAs should be viewed as prerequisites for welfare gains from membership in an RTA. Positive contributions on the part of developed members in a North-South RTA framework are highly desirable, since the developing members alone cannot control an elimination of distortions on the export side - a major source of distortion among developing economies. This, in turn, should provide second-round benefits to the members of a North-South RTA such as APEC.

In Chapter 6, we present an application of an AGE model to environmental issues. We evaluate economic impacts of a carbon tax levied on the consumption of fossil fuels such as coal, oil, and gas. We provide simulations under three scenarios: 1) a carbon tax introduction only in Japan; 2) a concerted introduction among OECD economies; and 3) a world-wide introduction of carbon taxes. Our simulation results imply that the incentive to cut fuel consumption is fairly limited under the first scenario. The results also imply that, although it is slightly more effective if the carbon tax on coal is introduced world-wide, including in developing countries, compared to an introduction limited to the OECD economies, the differences were negligible in the case of oil and gas. OECD economies, thus, should take an initiative in introducing carbon taxes. For Japan, the rate of reduction in fossil fuel consumption is largest when Japan introduces carbon taxes alone. This implies that a higher tax rate might have to be introduced in Japan when a carbon tax is introduced in a concerted manner either among OECD economies or world-wide.