Comparative Static Model and General Equilibrium Model - Economics Essay Example

2021-07-20 12:27:51
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A comparative static model is one which compares two different economic outcomes, before and after a shift in some external parameter (Acemoglu & Jensen, 2015). To put in more simple words, a comparative static model tries to analyze the impact of a parameter that has nothing to do with the system, initially. For example, if you are explaining the supply and demand of a product, then a shift or change in tastes and preferences occur, that would be considered an exogenous parameter. The idea is that an external action- in this case, changes in taste and preference will impact the initial model of supply and demand. The general equilibrium model is one who tries to compare the forces of supply and demand, with an aim that the price in those two cases will settle at some specific point, where there is a balance between supply and demand (Acemoglu & Jensen, 2015). The similarities in the two models are that they both deal with supply, demand, and price. Whereas comparative statics studies the impact of the external parameter, the general equilibrium will seek to explain a point of balance between supply and demand.

Model to Evaluate EU-Canada Trade Agreement

In analyzing the EU-Canada trade deal, the Comparative Static Model will be appropriate, and so is the general equilibrium model. First, you will need to know the economic impact of the elimination of tariffs in the two countries. The effect may be on the overall import-export statics, the production possibility frontiers, or the shifts in supply and demand. Impacts in those economic areas can best be explained by a comparative static model.

In analyzing the impact on prices of products in Canada and EU, a general equilibrium model will be perfect. The trade deal is likely to bring in more goods and services from EU which Canada do not have a comparative advantage producing. That would mean a new price will be set, based on new improve supply. In the EU, the same would happen, where Canada is likely to take its surplus. All these activities will have an impact on price in both economic regions.

The general equilibrium model needs empirical basis for their calculation (Andre, 2010), which serves a drawback. It, therefore, becomes challenging for researchers to choose things like functional forms, elasticity types among others. In comparative static modeling, it is the researcher who is left with the responsibility to establish the results validity. The methodology has no standardized testing procedure, which is a significant drawback.

References

Andre, F. (2010). Economic Policy Using Applied General Equilibrium Models: An Overview. Designing Public Policies, Economics and Mathematical Systems 642. Retrieved from http://DOI 10.1007/978-3-642-12183-8_2

Acemoglu, D., & Jensen, M. K. (2015). Robust Comparative Statics in Large Dynamic Economies. Journal Of Political Economy, 123(3), 587-640.

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