Table 6: Initial Levels and Changes in Macroeconomic Aggregates, Trade Scenarios

||2004|_BaU_|_CBL_|_CHN_|_CUS_|_C_<sup>_hi_</sup><br>_BL_|_CML_|_FL_|
|---|---|---|---|---|---|---|---|---|
|GDP at market prices|135.7|4.22|4.23|4.21|4.24|4.23|4.32|4.43|
|Real GDP at factor cost|120.5|4.23|4.23|4.23|4.23|4.23|4.23|4.24|
|Real GDP at market prices|135.7|4.17|4.16|4.16|4.17|4.18|4.18|4.21|
|Private consumption|116.0|4.15|4.16|4.14|4.17|4.17|4.21|4.31|
|Public consumption|16.7|4.17|4.16|4.16|4.17|4.18|4.18|4.21|
|Investment|35.6|4.17|4.16|4.16|4.17|4.18|4.18|4.21|
|Private investment|28.3|4.17|4.16|4.16|4.17|4.18|4.18|4.21|
|Public investment|7.3|4.17|4.16|4.16|4.17|4.18|4.18|4.21|
|Exports|57.3|3.99|4.45|4.48|3.98|5.03|5.21|6.12|
|Imports|89.9|4.03|4.34|4.34|4.05|4.72|4.89|5.58|
|Real GDP per capita|19,254|2.16|2.15|2.15|2.16|2.17|2.17|2.20|
|Real exchange rate|1.00|-0.05|0.00|0.00|-0.06|0.03|-0.01|-0.02|
|Welfare (EV)|||185|-336|532|458|1,612|4,400|
|Trade-to-GDP|108.5|105.3|110.6|110.8|105.2|117.0|117.9|127.5|
|Investment/absorption|21.2|21.2|21.2|21.2|21.2|21.2|21.1|21.0|
|Prv. inv./absorption|16.8|16.8|16.8|16.8|16.8|16.8|16.8|16.7|
|Gov. inv./absorption|4.3|4.3|4.3|4.4|4.3|4.3|4.3|4.3|
|Gov. cons./absorption|9.9|9.9|9.9|10.0|9.9|9.9|9.9|9.9|
|Gov. total spending/abs.|14.3|14.3|14.3|14.3|14.3|14.3|14.2|14.2|
|_Note:_ For each variable, the “2004<br>billions of lempiras, real GDP per <br>through 9 show the average annual<br>capita, and the exchange rate. Th<br>frst and the last period. Change in<br>between the value of the expenditu<br>such as trade-to-GDP are shown a<br>_Source:_ Author’s calculations.|” column <br> capita is i<br>growth ra<br>e growth <br> welfare is<br>re functio<br>s values in|contains <br>n lempir<br>tes betwe<br>rates are <br> shown a<br>n in 2016<br> 2016 for|the base <br>as, and al<br>en 2004 a<br> calculate<br>s the abs<br> in _BaU_ <br> each sim|year value<br>l ratios a<br>nd 2016 f<br>d assumi<br>olute dife<br> and in ea<br>ulation.|s. GDP <br>re in per<br>or GDP<br>ng expon<br>rence (in <br>ch of the|and its c<br>centage t<br>and comp<br>ential gro<br> millions <br> other si|omponent<br>erms. Col<br>onents, G<br>wth betw<br>of 2004 le<br>mulations.|s are in<br>umns 3<br>DP per<br>een the<br>mpiras)<br> Ratios|

components. The main point of the _CHN_ column is that own tariff liberalization vis-`a-vis the US is actually welfare-reducing for Honduras. This happens despite the fact that consumer prices are significantly lower than in _BaU_ and annual growth in total household income (through effects on factor prices, explored in more detail in the following section) is 0.11 percent above the growth observed in _BaU_ . The main reason for this outcome is the requirement of a fixed fiscal deficit: in order to compensate for the loss in tariff revenue, the direct tax rate in 2016 increases by 1.05 percentage point relative to _BaU_ (from 4.83 to 5.88 percent) and disposable income in the _CHN_ scenario actually grows slower than in _BaU_ . As a result, consumption and welfare in 2016 are lower in the _CHN_ scenario relative to _BaU_ . This outcome seems counterintuitive in a (mostly) neoclassical trade model, especially considering that it is not an artifact of model dynamics but is also present in comparative static results. However, several qualifications are in order. First, it is important to recognize that this scenario operates in a second-best world. In other words, while the removal of all tariff protection in Honduras (with a revenue-neutral increase in direct taxes) is unequivocally welfare-enhancing, the same does not need to hold if protection is only removed versus certain trading partners, such as the US. Second, the area of Harberger’s triangles— the source of efficiency gains from trade in the Heckscher-Ohlin world—depends on the ability of Armington agents to substitute cheaper imports for domestic goods in their consumption basket, 20