Computable General Equilibrium Analysis of Trade and Investment Dynamics

Computable general equilibrium (CGE) models provide a quantitative framework to evaluate how economies adjust to policy changes, technological shocks and shifts in global market conditions, capturing interactions between households, firms, governments and external sectors. Central to these models is the Social Accounting Matrix, which ensures consistency in expenditure and income flows across agents. In the context of trade and investment dynamics, CGE analysis extends the classical general equilibrium by incorporating multiple regions or countries, trade liberalisation, tariff reforms and the behaviour of multinational enterprises. Contemporary approaches often embed firm heterogeneity à la Melitz, allowing for productivity variation and entry–exit decisions under monopolistic competition. Dynamic CGE variants account for capital accumulation, labour mobility and adjustment costs, enabling the assessment of long-term welfare impacts. Applications span the economic assessment of trade agreements, foreign direct investment (FDI) policies, tariff reductions and regulatory reforms. By simulating relative price changes and resource reallocation, CGE studies highlight sectoral winners and losers, income distribution effects and the interplay between trade openness and investment facilitation. Through scenario analysis, policymakers gain insight into the global significance of policy choices, support evidence-based negotiation strategies and anticipate unintended consequences of trade and investment regimes.

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Computable General Equilibrium Analysis of Trade and Investment Dynamics publication trend

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Technical terms

Computable General Equilibrium (CGE) model: A quantitative framework that simulates how economies respond to policy or external shocks by solving for simultaneous equilibrium across markets.

Social Accounting Matrix (SAM): A data structure representing all transactions in an economy, linking incomes and expenditures of agents for model calibration.

Foreign direct investment (FDI): Cross-border equity investments by multinational enterprises, influencing capital flows, technology transfer and firm competition.

Monopolistic competition: A market structure where numerous firms produce differentiated products, allowing for price-setting behaviour and firm entry or exit.

References

1. Trade and foreign direct investment‐related impacts of Brexit. World Economy (2019).
2. Sectoral effects of the Japan-EU Economic Partnership Agreement for the European Union countries. Asia Europe Journal (2021).
3. Investment Facilitation for Development Agreement: Potential Gains. World Economy (2025).