The paper presents a review and critique of the most widely used trade models based on computable general equilibrium (or CGE) models, explaining the fundamental weaknesses of CGE models, paying particular attention to the way that CGE models conceptualise and measure welfare. The authors also show that the manner in which the World Bank uses CGE modelling is highly problematic as it makes implausible assumptions about elasticities, the exchange rate, and macro causality in a negligent manner, and this is particularly problematic in the context of developing economies. The authors also identify a particular inconsistency inherent in the use of Armington specification of imperfect competition between trading partners in CGE models that leads to incorrect estimation of welfare gains from liberalization.

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August 14, 2007.