Demand side: the Armington Assumption
SMART relies on the Armington assumption to model the behavior of the consumer. In particular, the adopted modeling approach is based on the assumption of imperfect substitutions between different import sources (different varieties). That is, goods (defined at the HS 6 digit level) imported from different countries, although similar, are imperfect substitutes—e.g., bananas from Ecuador are an imperfect substitute to bananas from Saint Lucia. Thanks to the Armington assumption, a preferential trade agreement does not produce a big bang solution, where all imports demand would shift to the beneficiary of the preferential tariff.
Within the Armington assumption, the representative agent maximizes its welfare through a two-stage optimization process:
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The World Bank, 2010