# **Appendix: The global, economy-wide GTAP database and the GTAP and LINKAGE CGE models**

To estimate the potential economy-wide effects of regional and multilateral trade liberalizations, by far the most common methodology since the 1980s has involved global computable general equilibrium (CGE) models and databases.<sup>36</sup> It is a daunting task to compile and periodically update all the necessary data for such a model so, under the direction of Professor Tom Hertel of Purdue University, a consortium was established more than a decade ago for this purpose. Known as GTAP (the Global Trade Analysis Project), it is currently providing Version 6 of its database publicly (with a pre-release of Version 7 now under review by consortium members). That database provides reconciled production, consumption and bilateral goods and services trade data plus subsidies and trade distortion estimates<sup>37</sup> (including developing country preferences) as of 2001 for more than 80 countries or country groups spanning the world, each divided into 57 sectors spanning the entire economy (see www.gtap.org). Earlier versions based on 1997 or 1995 data had less country and product disaggregation and did not include tariff preferences. This database is the foundation of most global CGE trade models in use today. Version 6 is described in detail in Dimaranan (2006).

In addition, the GTAP Center at Purdue University has developed its own family of applied general equilibrium models (Hertel 1997). The core GTAP model is a standard, multi-region CGE model that is currently being used by more than one thousand researchers in scores of countries on five continents. (The GTAP database builds on contributions from many of these individuals, as well as the national and international agencies in the GTAP Consortium.) Perfect competition and constant returns to scale are assumed for all sectors of each economy in the core comparative static version.

The GTAP model utilizes a sophisticated representation of consumer demands that allows for differences in both the price and income responsiveness of demand in different regions depending upon both the level of development of the region and the particular consumption patterns observed in that region. On the supply-side, differences in factor endowments within and between countries interact with different sectoral factor intensities to drive changes in the sectoral composition of output in response to structural or policy shocks. The GTAP production system distinguishes sectors by their intensities in five primary factors of production: agricultural land, other natural resources, unskilled labor time, skilled labor time, and physical capital. Thus in a region where physical capital is accumulating rapidly relative to other factors, for example, that region’s relatively capital intensive sectors tend to expand at the expense of other sectors. In addition to differences in intermediate input intensities, import intensities are also permitted to vary across uses. Since much trade is in intermediate inputs, the distinction between sales to final consumers and sales to other firms can be important. Lowering the cost of imported goods to consumers is quite different from lowering the cost of intermediate inputs to domestic firms that may be competing with imports in the final product market. As well, products are differentiated by place of production. The linkage between the different prices of a product is typically quite strong, but will depend on the degree of substitutability in consumption. In addition to matching up more effectively with reality, this approach has the advantage of permitting bilateral trade to be tracked, as opposed to simply reporting total exports net of imports.

> 36 On the need for adopting a general rather than partial equilibrium methodology, see Anderson (2002).

> 37 Estimating the height of trade barriers is a non-trivial task in itself, even for merchandise (Evans 2003) but especially for services (Findlay and Warren 2001) and if technical barriers to trade are involved (Maskus and Wilson 2001).

40