Terms of Trade and Parameter Sensitivity

1
Terms of Trade and Parameter Sensitivity

• Making Morocco a Small Economy

2
Base Case Worry

• Start from imperfect competition model
• FTA with Entry and Full Employment
• Morocco reduces Non-Agricultural protection vis a
  vis EU
• Whats to worry?
• Increase in Welfare, but small 25
• Large increase in Efficiency -- 681, but
• Large fall in TOT 650 Why????

3
Terms of Trade

• All export prices fall. What if we dont quite
  believe this?

4
How to get a smaller decrease in export prices?

• Some increases in export volumes are large
• Lower exports would drive down prices less
• Higher substitutability of exports would make
  prices less sensitive to export volume changes
• How to implement this in the model?2

5
Lower exports?

• What if the economy is less responsive to the
  policy shock?
• Made Capital and Skilled Labor sluggish
• Set SLUG (K,SL) -1
• Set ETRAE (K, L) -1

6
Higher Elasticity of Demand for Morocco exports

• Make export prices exogenous?
• Fixed export prices gt fixed domestic prices
• fixed domestic prices gt fixed factor prices
• fixed factor prices gt no equilibrium
• model crashes!!!!!
• Just increase all the ESubM?
• NO!
• The imperfect competition model is calibrated on
  a given set of elasticities changing them is
  inconsistent
• So..

7
Higher Elasticity of Demand for Morocco exports
(contd.)

• Increase ESubM only for the competitive sectors
  primary products
• Result
• Export prices fall less
• Export volume rises more