The Exercise

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Transcript The Exercise

The Exercise
• The shocks
– Unilateral tariff liberalisation of agro-processing sector by India
• Alternative closures rules
– Standard GTAP closure: Neo-classical where prices are
assumed to be flexible and act as the equilibrating mechanism
and all markets clear
– Micro-structuralist closure: Imperfections in unskilled labor
market - we assume that real wages for unskilled labour are
fixed exogenously unskilled labour supply adjusts to demand
• Rationale
– In case of India there exists considerable underemployment
such that production may increase without influencing the real
wage rate much
Implementation of the experiments in RunGtap
• The shocks in each case (sectors 14-20)
– Shock tms("CMT",REG,"IND") = target% 0 from file tms.shk;
– Shock tms("VOL",REG,"IND") = target% 0 from file tms.shk;
• The alternative closure
– Swap
qo(“unskilled”,”Ind”)=pfactreal(“unskilled”,”Ind”)
Where
– pfactreal(“unskilled”,”Ind”)=pm(“unskilled”,”Ind”) - ppriv(“Ind”)
– qo(“unskilled”,”Ind”)=supply of unskilled labour in India
– Pfactreal(“unskilled”,”Ind”)= ratio of return to unsklab to CPI in
India
Major Results
Welfare decomposition
Welfare effects of tariff liberalisation
Total
TOT effect
Endowment effect
Allocative efficiency
-1000
0
1000
2000
3000
US$ Mn
Standard closure
Fixed real wage (unskl,Ind)
4000
Results (contd.)
• Allocative efficiency gains arising from improved
allocation of resources
– 83% of the allocative efficiency gains are arising from
liberalisation of VoL imports
• ToT loss is explained by the need to restore equilibrium in
the trade balance: tms(agropr, r, ind)↓→↑Imports→BoP
deficit→↑exports→ToT↓
– 94% of the ToT losses are due to the decline in the price index
(psw) received for tradables in India
– 70% of the ToT losses are traced to the manufacturing and
services sector
• Endowment effect is a scale effect as labour previously
outside the market is drawn into the economy
– Supply of Unsklab increases by 1.16%