Chapter 2
General equilibrium trade policy analysis with structural gravity

In this chapter, you will learn:

  • how to perform general equilibrium counterfactual analysis of trade policy with the structural gravity model
  • how to obtain theory-consistent general equilibrium effects of trade policy with the structural gravity model by capitalizing on the property of the PPML estimator
  • how to construct theory-consistent indexes to aggregate and decompose the general equilibrium effects of trade policy
  • how the structural gravity model can be integrated with a broader class of general equilibrium models
  • how to interpret general equilibrium results to make trade policy inferences.

After reading this chapter, with sound econometric knowledge, and familiarity with Stata, you
will be able to perform general equilibrium counterfactual analysis of trade policy directly using
Stata, and construct a series of general equilibrium trade cost indexes and their responses to
trade policy changes.

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