Terms of Trade and Parameter Sensitivity Making Morocco a “Small Economy”

Base Case Worry Start from imperfect competition model FTA with Entry and Full Employment Morocco reduces Non-Agricultural protection vis a vis EU What’s to worry? –Increase in Welfare, but small – 25 –Large increase in Efficiency , but… –Large fall in TOT – 650 Why????

Terms of Trade All export prices fall. What if we don’t quite believe this?

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

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 BaseSlug Terms of Trade Allocative Efficiency Total Welfare

Higher Elasticity of Demand for Morocco exports Make export prices exogenous? –Fixed export prices => fixed domestic prices –fixed domestic prices => fixed factor prices –fixed factor prices => 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…..

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 BaseHigher ESubM Allocative Efficiency Terms of Trade Total Welfare