A General Equilibrium Approach to Estimating the Costs of Domestic Distortions
Abstract
Recent developments in the field of trade policy have been dominated by the elaboration of the theory of domestic distortions in open economies. Essentially the new approach focuses on the choice between alternative policies and provides a greatly improved method of analyzing the effects of trade policies. (See articles by Jagdish Bhagwati and Stephen Magee, 1973.) The analytical rigor and intellectual effort which has gone into this theoretical work has not been matched on the empirical side, where the measurement of the welfare costs of domestic distortions has concentrated on trade distortions and has most often been carried out in a partial equilibrium framework. The main objective of this paper is to examine the context within which the static welfare costs of distortions have usually been estimated and to outline an altemative approach to measurement based on a general equilibrium analysis. Some fixed point estimates based on Colombian data are provided to illustrate this approach. The framework used in measuring the welfare costs is thus in closer agreement with the theoretical analysis.
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