WASHINGTON — The Coalition for a Prosperous America (CPA) today announced that the peer-reviewed economics journal Empirical Economics Letters has published an article documenting the economic model developed by CPA’s Economics Team for analyzing the impact of trade policy on the U.S. and other economies. The article, titled “An Economy-Wide Model with Flexible Supply Response to Taxes and Tariffs”, shows how the U.S. economy can respond positively to import restrictions imposed via tariffs. The article is available (subscribers only) here.
The standard, widely-used trade model, Global Trade Analysis Project (GTAP), assumes full employment in the economy both before and after trade policy actions. This and other built-in assumptions make the model unrealistic and render it inevitably misleading as a forecasting tool. Veteran economic modeler Professor Tim Kehoe, who was an advisor at the Minneapolis Federal Reserve Bank, looked at years of GTAP studies and concluded the model had demonstrated “zero predictive accuracy.”
The CPA team modified the GTAP model with changes to two key parameters: 1) allowing domestic production to increase when tariffs are applied and; 2) allowing more capital and labor to flow into an industry when demand increases. In this way, import restriction generates growth in national gross domestic product, real household wages, and employment. Once production volumes can increase, price changes tend to be small. The parameters in the model modifications are based on actual U.S. data from recent experience. The modified model is called GTAP-FP.
Badri Gopalakrishnan and Jeff Ferry are the authors of the academic article published in Empirical Economics Letters. Gopalakrishnan is founder and CEO of Infinite Sum LLC, an economic consulting firm based in Seattle, Washington and on the advisory board of the GTAP Consortium. In the late 2000s, for almost a decade, he led development of GTAP at Purdue University. From 2022 to 2023 he was Head of Trade Policy at NITI Aayog, the Indian government’s economic policy advisory body chaired by Prime Minister Narendra Modi. Ferry is Chief Economist at CPA. In 2019, he won the Mennis Award from the National Association for Business Economics for the “Most Outstanding Paper” of the year. He holds economics degrees from Harvard University and the London School of Economics.
“The GTAP model is a very flexible and versatile model, but the standard version has embedded in it certain assumptions that make outcomes debatable in the literature, particularly for large economies like the United States, India, and others,” Gopalakrishnan commented. “Our technical modifications enable the model to generate more realistic scenarios of how import restriction can generate economic growth, based on recent empirical evidence from the USITC.”
“Standard GTAP was widely used in the U.S. by federal government agencies and generated misleading results repeatedly because it was unable to show that increased imports can lead to the decline of domestic industries,” said Ferry. “Our GTAP-FP model adds flexibility to the model, giving policymakers more tools to generate domestic economic growth and more accuracy in forecasting the results of policy actions.”
Read the full academic article (subscribers only) here.
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