# **_III.3.2. The GTAP database: A joint, global effort_**

GTAP data are currently the most comprehensive and up-to-date data source for the purpose of applied trade policy analysis. We will be working with the GTAP-7 database. GTAP-7 is based on observed prices, trade flows and protection levels (applied, trade-weighted tariffs) from the year 2004. The entire world economy is represented in GTAP-7, but some countries are aggregated into supra-national regions. Altogether 105 individual geographical regions are represented, and in each of these regions up to 57 individual sectors can be modeled. Of the 57 sectors, 12 represent primary agricultural products, and 8 represent processed foods. This is, in comparison with many other CGE models, a relatively high level of agricultural disaggregation that makes it possible to consider detailed agricultural liberalization scenarios. Tables C1 and C2 in the Appendix C provide complete lists of the available regions and sectors in GTAP-7.

GTAP-7 is the first GTAP database that considers Ukraine, Kazakhstan, and Russia as separate countries, which is a significant advantage for our purposes. As is always the case when a country is added to the GTAP database, the GTAP centre has organized the collection, harmonization and compilation of the data for Ukraine into one single, consistent database, with the help of Ukrainian experts. Many other modeling frameworks do not consider Ukraine separately (but rather as part of some aggregate such as the ‘Former Soviet Union’), and existing models that do consider Ukraine separately tend to be stand-alone models that have been developed for some specific application involving Ukraine but are not widely available and have not been subjected to the sort of scrutiny that the GTAP network provides.

# **_III.3.3. The standard GTAP Model_**

The standard GTAP model is a comparative-static CGE model that assumes constant returns to scale and perfect competition in all markets. The model and all its equations are described in detail in Hertel (1997). The production side of this model is represented through a set of nested constant elasticity of substitution functions (CES). These functions combine primary and intermediate inputs for the production of final goods. Consumption of private households is modeled as a constant difference of elasticity (CDE) function.

Import demand follows the specification proposed by Armington (1969). According to this specification, a further set of nested CES functions determines to what extent imports from various sources substitute for one another to form bundles of imports, and to what extent these bundles of imports substitute for domestically produced goods to satisfy final demand. The Armington assumption implies that all traded goods in a category of products are weakly separable substitutes distinguished by country of origin. For instance, the Armington assumption implies that in tractors trade between Ukraine and the EU, ‘EU tractors’ constitute a slightly different product than ‘Ukrainian tractors’, and that consumers of tractors in either country choose between domestic versus imported tractors according to the exogenously specified Armington substitution parameter.

For many applications, the assumptions just mentioned provide a reasonable approximation of reality. In some instances, however they must be handled with care. For example, the Armington specification is a typical feature of modern CGE models. But it is based on parameters that are difficult to estimate, and it is known to have a strong impact on the results of trade policy simulations (Hess and von Cramon-Taubadel, 2008). In some cases, the 25