Panama`s Entrance into the Central American Common Market The Macroeconomic Effects

Panama`s Entrance into the Central American Common Market The Macroeconomic Effects

Panama and the Central American countries have discussed their economic integration for a long time, but thus far no viable mechanism has been agreed on. Their mutual trade remains based on preferential trade agreements on a reduced number of products. One factor that may inhibit advancing on their trade relationships is the lack of studies that quantij5t the impacts of deeper economic integration. This paper presents a six country interdependence model, representing each of the Central American countries plus Panama. Panama`s entrance into the Central American Common Market is simulated by an increase in its marginal propensity to export to Central America. An equation that expresses the increment in the GDP vector due to such change is derived. The model is calibrated with 1992 national accounts and trade data. The results indicate that Panama and Central America would gain from establishing a reciprocal free trade regime in the framework of the Central American Common Market.