The GTAP Model

The GTAP model draws on a set of economic accounts for each country/region, with detailed inter-industry links. Using a global CGE model such as GTAP enables interactions between regions and sectors to be captured within a fully consistent framework. Although it is a very comprehensive global trade model, simplifications, and abstractions from the real world still have to be made.

The model we used for this study is comparative, static, and assumes perfectly competitive markets with constant returns to scale, as in the standard version of the GTAP model (Hertel 1997). Other standard features of the model are also retained, for example, the behavior of private individuals, firms, and governments is modeled, along with responses to changing resource and market conditions. Consumers maximize welfare, subject to their budget limitations, with a relatively sophisticated representation of consumer demand, allowing for regional differences in the price and income elasticities of demand. Firms maximize profits using the limited resources available in the economy. In particular, five primary factors of production (land, natural resources, physical capital, and skilled and unskilled labor) are combined with intermediate inputs, including imports, to produce final output. Armington elasticities allow differentiation between imports from different countries in the GMS and elsewhere, specifying the extent to which substitution is possible between imports from various sources, as well as substitution between imports and domestic production. When the impact of the infrastructure improvement is simulated, prices and quantities of marketed commodities, along with impacts on incomes and GDP, are all endogenously determined within the model.¹⁰

4.1 The GTAP Database

For the current version of this paper, we used version 7 of the GTAP database, covering 113 countries/regions and 57 sectors, with a base year of 2004. This version of the GTAP database includes Cambodia, Lao PDR, Myanmar, Thailand, and Viet Nam. While the PRC is available in the GTAP database, Yunnan Province and Guangxi Zhuang Autonomous Region are not available separately, therefore we included the PRC in the analysis.¹¹ We aggregated the GTAP 7 database to cover available GMS regions and incorporate relatively heavy disaggregation of sectors of key importance to the region. Details of the regional and commodity aggregation used are in Table A.1 [ PDF 9.7KB | 1 page ] and Table A.2 [ PDF 9.8KB | 1 page ].

The GTAP model includes international transportation margins for air, water and other transportation (which is primarily land transport). Table A4.A [ PDF 12.6KB | 1 page ] and Table A4.B [ PDF 12.7KB | 1 page ] of the Appendix show the cost of bilateral GMS land transport margins as a proportion of the value of exports as calculated from the GTAP database. Cross-border land transport costs are likely to be relatively significant for poorer economies with less-developed infrastructure. This appears to be reflected to some extent in the database, with cross-border land transport margins appearing most significant for the relatively poor countries of Cambodia, Myanmar, and Lao PDR.¹²

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