A snippet on economic modelling
Economic analysis of policy proposals may be based either on first principles or on economic modelling. The proposed FTA is too complex to be analysed simply in terms of first principles. Nevertheless, a great deal of insight can be obtained from simple parametric models of various aspects of the proposal.
As compared to a large-scale simulation model, this approach has the advantage of clarifying the processes leading to estimates of costs and benefits. A large-scale model offers greater precision and the capacity to model policy outcomes for particular regions and industries. However, where there is a large divergence in estimates of aggregate outcomes between simple and elaborate models, this divergence is rarely a consequence of greater precision in the elaborate model. More frequently, the divergence is the result of differences between the economic assumptions used to ‘close’ (that is, derive an equilibrium for) the elaborate model and the economic assumptions used in the simple model. Hence, there should be no automatic preference for the results of more elaborate models. What matters is the validity of the core assumptions.