The Welfare Analysis of a Free Trade Zone: Intermediate Goods and the Asian Tigers

摘要

How should we analyse the effects of trade reform? More generally, what modelling framework should we adopt if we wish to examine the effects of policy changes upon countries that trade heterogeneous goods? The Armington approach has become quite standard for some time. Here, traded goods are distinguished not only by physical type but also by place of origin. Thus, for example, a Japanese car is different from a Korean car. A main reason for adopting the Armington approach is to avoid complete specialisation in trade. If Japanese and Korean cars were identical, then general equilibrium models would generally yield corner solutions in which the country with the lowest per-unit production cost would produce all output. Of course actual trade data do not reflect such specialisation.