The economics underlying NiGEM


The trade equations depend upon demand and relative competitiveness effects, and the latter are defined in similar ways across countries. It is assumed that exporters compete against others who export to the same market via relative prices and demand is given by the imports in the markets to which the country has previously exported while imports depend upon import prices relative to domestic prices and on demand. As exports depend on imports, they will rise together in the model. Systems of trade equations are 'closed' to ensure that the world balance of trade adds up, at least to its normal degree of accuracy, in any simulation.

The equations are estimated in equilibrium correction form, with panel data techniques being used in recent research. The model covers trade in goods and services, with export prices and import prices being linked for consistency using Armington matrices for demand and prices. Trade competitiveness depends upon relative prices, and after any shock the model should return to a long run real equilibrium exchange rate pattern of its own accord.

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