The accession of the UK to the EC: A welfare analysis

Abstract:

This article provides a decomposition of the welfare impact on the UK arising from the changes in manufacturing trade consequent upon joining the EC. The methodology employed is that of computable general equilibrium (CGE) modelling, where the underlying model is based on trade under imperfect competition with firms producing under conditions of increasing returns to scale. CGE models can be seen as providing numerical illustrations of theory, or as empirical tools providing estimates of policies. A second aim of this article is then to asses the extent to which CGE models can be used as serious tools of policy analysis. We examine this by assessing the success of the model in replicating counterfactual outcomes. The results indicate (i) that the model does reasonably well in replicating complex reality and that such models can be empirically useful; (ii) that a substantial portion of the welfare impact is attributed to distortions associated with imperfect competition, and that the impact is potentially quite large.