In a simplified version of Global Trade Analysis Project (GTAP) model, there are two kind of economic activities that supposed to be overviewed and from those points, the basic notation, equations, and intuition of GTAP then can be developed.
Firstly, consider, a closed economy without taxes, no subsidy, no depreciation are present in one region.. Since there is no tax, then income of regional household will come from the sale of endowment commodities to firms (VOA). Firms will combine these endowment commodities with intermediate goods (VDFA) to produce goods for final demands. Of course this involves sales to private households (VDPA), government households (VDGA), and the sale of investment goods to satisfy the household regional’s demands for saving (REGINV).
Secondly, consider, an open economy without taxes. This introduces international trade by adding another region, Rest of The World (ROW). ROW is a source of imports, and also a destination for exporting. (VXMD). Note, that import is traced by agents in domestic economy that resulting in distinct import payments to ROW from private households, government households (VIGA), and firms (VIFA).
Then in the domestic markets in r region, we found that there is one to one relationship between producing sectors and commodities as following
VOA (i,r) : PS (i,r) * QO (i,r)
= VOM (i,r) : PM (i,r) * QO (i,r)
VDM(i,r) also consider VST (i,r)
VXMD (i,r,s) : PM (i,r) * QXS (i,r,s)
VXWD(i,r,s) : PFOB(i,r,s) * QXS (i,r,s)
While at global market, value of transportation from r to s (VTWR) must be added as following
= VIWS(i,r,s) : PCIF(i,r,s) * QXS(i,r,s)
= VIMS (i,r,s) : PMS(i,r,s) * QXS(i,r,s)
VIM(i,s) : PIM(i,s)*QXS(i,s)
Then we can write the market clearing condition for tradable commodities supply as following :
VOM(i,r) = VDM(i,r)+VST(i,r)+∑VXMD(i,r,s)
in term of price and quantity for i and region r
Divided by PM(i,r) then we obtain the usual form in clearing condition
as we are interested to see the behavioral component in the model in percentage changes then we use solution of nonlinear AGE models via a linearized representation as written in the formula :
hence equation 2.1 becomes :
GTAP also consider such a matter like behavior(firms,households, and government)
Firms behavior is understood as a natural act of the firms to survive in production, purchasing and selling. It is represented in this CES composite:
Whereas, household behavior is governed by an aggregate utility function (private consumption, government purchases, and savings).
GTAP does not take into account to macroeconomic policies and monetary phenomena. Rather, it concerns with simulating the effects of trade policies and resource-related shocks on the medium term patterns of global production and trade. And at the end GTAP take into account such as distribution sales to regional market (iεTRADE), sources of household purchases (iεTRADE), sources of firms’ purchases (jεPROD), sources of household factor service income, disposition and sources of regional income, international transport sector, demand for regional investment goods. And GTAP also provide accounting of relationships in the model, price linkage equations, composite imports nest, behaviour equation both for households (private, regional, government) and firms.