Predicting Trade Expansion under FTAs and Multilateral Agreements

Dean A. DeRosa (PIIE) and John P. Gilbert (Utah State University)
Working Paper
05-13
October 2005

How well do economic models predict trade and output expansion under bilateral and multilateral agreements? DeRosa and Gilbert investigate the predictive power of two popular quantitative world trade models--the single-equation gravity model and the multiequation computable general equilibrium (CGE) model--as applied to three major trade liberalization agreements: Mercosur, NAFTA, and the Uruguay Round. They explore both "naïve" and sophisticated variants of the models and find that the naïve gravity model tends to overpredict intrabloc trade expansion while the naïve CGE model tends to underpredict. Adding expansion of the factors of production and productivity growth to the CGE model improves its record.