Trade and Employment From Myths to Facts - International Labour ...

Trade and Employment: From Myths to Facts
social accounting matrix adapted from the 1992 SAM for Chile. The full-sized SAM
from which the table was taken has five household categories and a more complex
system of domestic and foreign transfers than that shown here.
A SAM is not, formally speaking, a model inasmuch as it has no behavioural
equations. It is rather a snapshot of economic activity on a given date, in this case
1992. A wide variety of models can be calibrated to the same SAM. 33 Desktop CGE
models can be easily calibrated to SAMs of this size and then solved in Excel with
limited need for advanced computer skills. More sophisticated software and stronger
computer skills are necessary to calibrate CGEs to larger datasets. Decaluwe and his
associates have, for instance, shown that CGE models can be merged with household
survey data to provide a rich mosaic for policy analysis (Decaluwe and Martens,
1988). Households need not be aggregated at all and models with large numbers of
household units, sometimes numbering into the thousands, can be handled in the
CGE programming framework. Thus, the impact of trade policy can be finely disaggregated.
Issues concerning both the size and functional distribution of income
can be investigated and the impact on employment assessed. Since CGE models
are typically multi-sectoral, one can easily examine the impact on workers of a certain
skill category in a given sector of the economy.
CGE models need to make assumptions regarding the behaviour of consumers,
firms and the government. The current account balance is also taken into account.
One typically uses a linear expenditure system (LES) for the consumption function
although other demand systems can also be used (Sadoulet and de Janvry, 1995).
The addition of the LES closes the essential circular flow of income and it is left
to the model builder to supply equations for other components of aggregate demand.
Investment, for example, might be taken as a function of capacity utilization, the
profit rate, or even the interest rate if a monetary side of the model were added.
Government is usually taken as an exogenous policy variable on which to run comparative
static exercises. For the purposes of this chapter, the net export function is
key: net exports should rise with the real exchange rate, ep * /p, where e is the nominal
exchange rate, p * is the foreign price and p is the domestic price level, usually the
GDP deflator or some other aggregate. Net exports should also fall with the level
of income, according to some marginal propensity to import. Most models adhere
to a version of the Marshall-Lerner condition, which ensures that a devaluation will
not increase the value of imports in local currency so much that they more than
offset the export response. The price level for each sector can either be determined
by a flexible price that balances supply and demand at full capacity utilization or
a markup on unit costs, including intermediate, wage and import costs. Indirect or
value-added taxes are also added in.
33 The simplest is perhaps a structuralist model in which aggregate demand determines the level of
capacity utilization in a given period, with investment increasing capital stock in the next. The key
to this kind of model is the distinction between investment by origin, that which contributes to aggregate
demand, and investment by destination that causes an increase in productivity and capacity
utilization for the next period.
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