Table 10: Initial Levels and Changes in Macroeconomic Aggregates, FDI Scenarios

||2004|_BaU_|_IBL_|_I_00|_I_<sup>_sub_</sup><br>_BL_|_IML_|_I_<sup>_λL_</sup><br>_BL_|
|---|---|---|---|---|---|---|---|
|GDP at market prices|135.7|4.20|4.42|4.40|4.12|4.50|4.46|
|Real GDP at factor cost|120.5|4.22|4.43|4.43|4.18|4.43|4.47|
|Real GDP at market prices|135.7|4.17|4.33|4.33|4.07|4.34|4.37|
|Private consumption|116.0|4.14|4.30|4.29|4.43|4.34|4.33|
|Public consumption|16.7|4.17|4.33|4.33|4.07|4.34|4.37|
|Investment|35.6|4.16|5.39|5.38|4.07|5.41|5.42|
|Private investment|28.3|4.16|5.65|5.63|4.07|5.66|5.68|
|Public investment|7.3|4.17|4.33|4.33|4.07|4.34|4.37|
|Exports|57.3|4.01|4.73|4.30|4.15|5.29|4.77|
|Imports|89.9|4.04|4.97|4.69|4.58|5.37|5.00|
|Real GDP per capita|19254|2.16|2.32|2.32|2.06|2.33|2.36|
|Real exchange rate|1.00|-0.03|-0.05|-0.10|-0.04|-0.05|-0.05|
|Welfare (EV)|||4213|4011|7888|5474|5117|
|Trade-to-GDP|108.5|106.0|113.7|108.9|111.8|119.2|113.7|
|Investment/absorption|21.2|21.2|23.3|23.3|20.6|23.3|23.3|
|Prv. inv./absorption|16.8|16.8|19.1|19.1|16.3|19.0|19.1|
|Gov. inv./absorption|4.3|4.4|4.2|4.2|4.2|4.2|4.2|
|Gov. cons./absorption|9.9|10.0|9.7|9.7|9.7|9.7|9.7|
|Gov. total spending/abs.|14.3|14.3|13.9|14.0|13.9|13.9|13.9|
|_Note:_ For each variable, the “2004”<br>are in billions of lempiras, real GDP<br>Columns 3 through 8 show the ave<br>components, GDP per capita, and<br>exponential growth between the frs<br>diference (in millions of 2004 lem<br>_BaU_ and in each of the other sim<br>2016 for each simulation.<br>_Source:_ Author’s calculations.|column c<br>per capi<br>rage ann<br> the exch<br>t and the<br>piras) bet<br>ulations.|ontains t<br>ta is in le<br>ual growt<br>ange rate<br>last perio<br>ween the <br> Ratios s|he base<br>mpiras,<br>h rates <br>. The <br>d. Cha<br> value o<br>uch as t|year values<br>and all rati<br>between 20<br>growth rat<br>nge in welfa<br>f the expen<br>rade-to-G|. GDP<br>os are i<br>04 and <br>es are c<br>re is sh<br>diture <br>DP are|and its com<br>n percentag<br> 2016 for G<br>alculated a<br>own as the<br>function in <br>shown as v|ponents<br>e terms.<br>DP and<br>ssuming<br>absolute<br> 2016 in<br>alues in|

household disposable income falls from 17.4 percent to 14.0 percent. Although the “pie” is in fact smaller in the _IBL_<sup>_sub_scenariocomparedwith</sup><sup>_IBL_(realGDPin2016intheformeris3percentlower</sup> than in the latter), the share of the pie allocated to consumption increases enough to offset any potential losses to consumers and make them better off. This result is unlikely to hold in the long run, as the reallocation of resources from saving to consumption cannot forever offset the penalty of slower income growth, but, at least in the time span of our model, replacing domestic investment with FDI appears to benefit consumers. It should be noted, of course, that the utility function does not include saving and the EV metric is therefore explicitly biased toward producing the above results. Thus, the effects on welfare in the _IBL_<sup>_sub_scenario should be interpreted with caution.At the</sup> same time, this scenario clearly shows that if new FDI simply replaces domestic investment, the consequences for growth can be negative.

As before, the implementation of DR-CAFTA among all signatories ( _IML_ ) results in much larger welfare gains than in the bilateral CAFTA scenario ( _IBL_ ). Welfare improvements in the former reach 2.38 percent of GDP in the final year, although the difference between the _IML_ and _IBL_ scenarios is much less pronounced than between simulations that did not consider an increase in foreign investment inflows ( _CBL_ and _CML_ ). This is due to the fact that the increase in investment 37