Decomposing Welfare Changes : An Application to Trade Liberalization in Bangladesh

In this paper, we numerically illustrate the method for exact decomposition of the welfare effects of policy reforms, proposed by Fane and Ahammad (2004), by analyzing some trade liberalization scenarios in Bangladesh. Fane and Ahammad extend Harberger's method for decomposing the welfare effects of infinitesimal changes to provide an exact decomposition of the equivalent variation of finite exogenous shocks into components corresponding to the alleviation, or exacerbation, of existing market distortions. The proposed decomposition methodology has a sound theoretical foundation and provides quantitative information about policy distortions and how they interact with policy reforms in question. In a computable general equilibrium (CGE) modelling framework, the methodology also helps to illuminate the properties of the underlying model and shocks, and thereby helps to make comparisons among alternative models