Page 33 - Azerbaijan State University of Economics

V.Bayramov: Economic diversification policy in context of Azerbaijan's accession
to the WTO

reviewing the path towards WTO accession for Azerbaijan (Hasanov and Zeynalov
2013; Kavass 2008; Fariz 2007). Nevertheless, it should be noted that, none of these
studies simulate the macroeconomic consequences of WTO accession for the
economy of Azerbaijan.
In addition, the above-mentioned studies have been conducted to simulate the
macroeconomic effects of WTO accession using computable general equilibrium (CGE)
models. For instance, in the case of China (Fan and Zheng 2001), Ukraine (Pavel et al.
2004) and the completion of the Doha Round (Hertel and Winters 2006). The lack of
comparable study case of Azerbaijan makes it harder to forecast the disadvantages and
the advantages of the WTO accession.
In order to analyze the macroeconomic effects WTO accession would cause
for the Azerbaijani economy, a Computable General Equilibrium (CGE) model was
chosen for the empirical part of this study. The idea of “general equilibrium” builds
on the assumption that all markets, sectors and industries are linked with each other.
CGE models can be applied to come up with numerical forecasts by obtaining
results for endogenous variables based on certain assumptions about exogenous
variables, their functional forms, and parameter values.
It also should be taken into account that CGE models have become a standard
tool for empirical analysis and are particularly suitable to assess the aggregate
welfare implications of economic policies. They are also used to study the effects of
external shocks such as accession to an international organization. Studies using
CGE models focus on different policy areas including development economics (De
Maio et al. 1999; Robinson 1989), fiscal policy (Shoven and Whalley 1984),
currency devaluation (Thissen and Lensink 2001), and social and environmental
policy (O‟Ryan et al. 2005; Bouvenberg and Goulder 2002) [1].
The modeling principle of CGE rests on neo-classical economic assumptions.
In an economic system, consumers are assumed to maximize their utility against a
budget constraint (demand side). Producers are assumed to maximize their profit
given the prices of goods and production costs (supply side). As a result, the
equilibrium condition for the market price is calculated for each good and
production factor where demand equals supply.
Furthermore, neoclassical models assume that all commodities are tradable and
that all commodities are perfect substitutes. Thus, the “law of one price” must hold, i.e.
all commodities should have the same price in all markets. It is also assumed that a

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