I Introduction and overview

The purpose of this chapter is to develop the basic notation, equations, and intuition behind the GTAP model of global trade. The computer program documenting the basic model, GTAP94.TAB, is available in electronic form via the Internet (see Chapter 6). It provides complete documentation of the theory behind the model, and when converted to executable files using the GEMPACK software suite (Harrison and Pearson 1994), it forms the basis for implementing the applications outlined in Part III of this book.

The organization of this chapter is as follows. We begin with an overview of the Global Trade Analysis Project (GTAP) model. Next, we develop the basic accounting relationships underpinning the data base and model. This involves tracking value flows through the global data base, from production and sales to intermediate and final demands. Careful attention is paid to the prices at which each of these flows is evaluated, and the presence of distortions (in the form of taxes and subsidies). The relationship between these accounting relationships and equilibrium conditions in the model is then developed. This leads naturally into a discussion of the implications of alternative “partial equilibrium” closures whereby these equations are selectively omitted and the associated complementary variables are fixed. The chapter then turns to the linearized representation of these accounting relations.