The model developed in this paper consists of a multi-regional CGE framework containing a twelvesector, nine-region, general equilibrium model, where the regional CGE models are inter-connected through trade flows.'<sup>4</sup> For the purpose of describing the model, it is useful to distinguish between the individual "country" models and the multi-region model system as whole, which determines how the individual country models interact. When the model is actually used, the _within_ country and _between_ country relationships are solved for simultaneously.

The APEC-CGE model includes several features that are not ordinarily incorporated into other multicountry CGE trade models. First, when modeling import demands, the Almost Ideal Demand System (AIDS) specification is adopted. This specification allows import expenditure elasticities to be different from one and also allows cross-country substitution elasticities to vary for different pairs of countries. Second, to capture the potential dynamic effects of trade liberalization, the APEC model can include equations for generating positive extemalities through both export expansion and the importation of new capital goods. These new features are described below.

The model data base consists of social accounting matrices (SAMs) for each country, including data on their trade flows.'<sup>5</sup> The development of a consistent multi-country data base is itself a major task; for our model, we relied primarily on the GTAP database [Hertel (1996)], supplemented by some additional data on factor endowments (particularly labor) and tariff and non-tariff barriers. The SAM starts from multisectoral input-output data, which are expanded to provide information on the circular flow of income from producers to factors to "institutions," which include households, enterprises, government, a capital account, and trade accounts for each partner country, and for the rest of the world. These institutions represent the economic actors whose behavior and interactions are described in the CGE models. The parameter estimates for the sectoral production functions, consumer expenditure functions, import aggregation functions, and export transformation functions were estimated from base-year data and from a variety of econometric sources. The various parameters used in the model represent point estimates for the base year (1992) and the model was benchmarked so that its base solution replicates the base data.

Each sub-regional or "country" CGE model follows closely what has become a standard theoretical specification for trade-focused CGE models.'<sup>6</sup> In addition to twelve sectors for each country model, the model has four factors of production (two labor types, land, and capital). For each sector, the model specifies output-supply and input-demand equations. Output supply is given by translog value added cost functions, while intermediate inputs are demanded in fixed proportions. Producers are assumed to maximize profits, implying that each factor is demanded so that marginal revenue product equals marginal cost. However, factors need not receive a uniform wage or "rental" (in the case of capital) across sectors; it is possible to impose sectoral factor market distortions that fix the ratio of the sectoral return to a factor relative to the economywide average return for that factor.

> 1<sup>4</sup> The model also permits regional interactions through endogenous migration of capital and labor, but for all experiments presented in this paper, this feature is not used. See Hinojosa-Ojeda, Lewis, and Robinson (1995) for analysis of a Greater North America Free Trade Area (GNAFTA) using a similar model that includes labor migration.

> **''** Social Accounting Matrices are described in Pyatt and Round (1985).

> 16 Robinson (1989) surveys CGE models applied to developing countries. Shoven and Whalley (1984) survey models of developed countries The theoretical properties of this family of trade-focused CGE models are discussed in Devarajan, Lewis, and Robinson (1990). A full presentation of the APEC-CGE model appears in the appendix of this paper.

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