Incorporating international ownership of endowments into a global applied general equilibrium model

Abstract

The ability of comparative static models to capture the long-run effects of trade liberalisation is often limited by their inability to take account of capital accumulation and track foreign ownership. In this paper a method for endogenising capital and tracking foreign ownership is outlined. The mechanism adopted uses endogenous risk premium to explain how investors allocate their saving across regions. This mechanism is incorporated into the GTAP model and used to simulate the long-run effects of Asia–Pacific trade liberalisation. The results show that foreign capital ownership can significantly affect the projected long-run results of trade liberalisation.