Quarterly Review 1822

Capturing NAFTA's Impact With Applied General Equilibrium Models

Patrick J. Kehoe | Stanford University, University College London, Federal Reserve Bank of Minneapolis
Timothy J. Kehoe | Consultant

Spring 1994

We examine the results of four static applied general equilibrium (AGE) modeling teams' analyses of the effects of NAFTA. What they show is that Mexico's economy, because it's the smallest, will see the biggest NAFTA-produced increase in economic welfare: from 2 to 5 percent of GDP. The U.S. welfare increase will be small, around 0.1 percent of GDP; Canada will notice no welfare increase due to NAFTA. We then discuss two examples of dynamic phenomena—labor force adjustment and capital flows—which are likely to influence NAFTA's welfare impact, but that aren't easy to incorporate into static AGE models. Early results indicate that this is an important direction for future study.

Published In: Modeling North America's economic integration (1995, pp. 33-57)

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