Introduction

This introduction presents an overview of the key concepts covered in the subsequent chapters of this book. The book sets out the way in which the theoretical model is empirically applied, gives the stochastic specification, discusses the estimation procedures, and provides an overview of the data base and the parameter estimates. The model is formulated with the aim of assessing empirically the effects of three key policy variables on trade flows, domestic prices, and the trade balance. The model which is developed to analyze the effects of these policies builds on the general equilibrium models which are well-known from the pure theory of trade. In this model, it turns out that wealth is the buffer stock to consumption. Another property of the model of saving is that desired wealth and, hence, also saving in the short-run are functions of relative prices. This property generates a dynamic response to a tariff change, for example.