Computable general equilibrium modeling of trade liberalisation and employment effects in Australia

The pure theory of international trade demonstrates cogently that free trade is first best or Pareto optimal. However, nationally, a move towards freer trade results in gainers and losers as explained by the Stolper-Samuelson theorem. Trade liberalisation between Australia and developing economies could reduce real wages of unskilled labour in Australia due to real wage convergence as postulated by the factor price equalisation theorem. A major aim of this study is to examine empirically, using computable general equilibrium (CGE) modelling the economy-wide effects of trade liberalisation in Australia. For this purpose the latest 109-sector Australian input-output table was aggregated and then updated using RAS techniques. The updated database was used to simulate the economy-wide effects of implementing trade liberalisation policies. The CGE model used in this study was of the ORANI-F type and the model equations were defined in Johansen or linearised form. The model closure was specified in terms of sectoral reductions of tariffs as announced in the recent government policy statements. The GEMPACK software programs were used to condense and simulate the economy-wide consequences of the adoption of trade liberalisation policies in Australia. The macroeconomic implications and the sectoral decomposition of the trade liberalisation effects were then analysed empirically.