Partial Equilibrium Modeling

Abstract

Introduction By definition, partial equilibrium models do not take into account many of the factors emphasized in general equilibrium trade theory. While this is the root of the practical limitations of applied partial equilibrium modeling, it is also the source of its basic advantage. By focusing on a very limited set of factors, such as a few prices and policy variables, applied partial equilibrium models allow for relatively rapid and transparent analysis of a wide range of commercial policy issues. As long as the limitations of the approach are kept in mind, useful insights can often be drawn under time and data constraints that preclude more complex forms of analysis. In many circumstances, in fact, it may be difficult to justify devoting otherwise scarce resources to more complex and less transparent models, when they may yield only marginal extensions of the basic insights drawn from simpler approaches. In other situations, such as econometric exercises, it may simply be impossible to introduce general equilibrium constraints to the relevant market equations. Our primary objective in this chapter is to present basic techniques for a relatively simple, partial equilibrium approach to comparative static analysis of commercial policy. However, while our ultimate goal is partial equilibrium analysis, we start by grounding the modeling framework in standard general equilibrium trade theory. Our intent is to use trade theoretic concepts as a reference point, both to offer general equilibrium interpretations for “'partial” equilibrium measures related to welfare and to make explicit what limitations we adopt when we choose this type of approach.

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