In this chapter, we describe the two components of the database of a computable general equilibrium (CGE) model. The first is the Social Accounting Matrix (SAM). The SAM database reports the value of all transactions in an economy during a period of time. The data are organized in a logical framework that provides a visual display of the transactions as a circular flow of national income and spending. The SAM’s microeconomic data describe transactions made by each agent in a region’s economy. When aggregated, the SAM’s micro data describe the region’s macro economy. The SAM’s micro data can be used to calculate descriptive statistics on an economy’s structure. We describe three extensions to a SAM: non-diagonal make matrices, domestic trade margins, and multi-region input-output tables. A CGE model database also includes elasticity parameters that describe the responsiveness of producers and consumers to changes in income and relative prices. The role of these parameters in driving model results can be evaluated in a sensitivity analysis.

In this chapter, we present the building blocks for trade policy analysis using a computable general equilibrium (CGE) model. We begin by reviewing the trade data in the Social Accounting Matrix (SAM). Next, we introduce two concepts, the real exchange rate and terms of trade, and explain how they are represented in standard CGE models. We then focus on trade theory as we simulate and interpret the results of two types of shocks: a change in factor endowments that change comparative advantage, and a change in world prices that changes industry structure, trade, and factor returns. We study an example of “Dutch Disease,” a problem that illustrates the links between a change in world prices, the real exchange rate, and industry structure. We conclude with an explanation of the role of trade margin costs in international trade.