Methodology
The GTAP model, a multi-region computable equilibrium (CGE) model, is one of the most popular models for analyzing the impact of trade policy. There are various advantages to the GTAP model. Firstly, since it is a multi-regional model of world production and trade, it can take into account the overall trade implications of Laos’ WTO accession as well as third-party countries. Secondly, it contains a database for different sectors and thus can explore the trade implications for various sectors of interest.6
The GTAP model assumes perfectly competitive markets, where the zero profit condition holds, and all the markets are cleared. The regional household allocates expenditures across three categories: private household, government, and savings. It derives income from the “sale” of primary factors to the producers, which combines them with domestically produced and imported intermediate composites to produce final goods. These final goods are in turn sold both domestically to private households and the government, and exported to the rest of the world. Both government and private households also import final consumption goods from the rest of the world. A global bank intermediates between global savings and regional investments by assembling a portfolio of regional investment goods and selling shares in this portfolio to regional households in order to meet their savings demands. Finally, a global transport sector assembles regional exports of trade, transport and insurance services and produces composite goods used to move merchandise trade among regions (Hertel & Tsigas, 1997). The production structure in the GTAP model is illustrated in Figure 1.
However, the newest version of the GTAP 7 database includes Laos’ input-output table, which might provide significant contributions to empirical studies of this issue. The latest version of the GTAP database, version 7, is used for this study. To facilitate our analysis, we have aggregated sectors into 10 sectors and the country into 21 regions. The breakdown of sectors and regions is shown in appendix (see Tables A1 and A2).
There are various routs of the GFC on Lao economy such as declining demand for Lao exports, declining