Agent-Based Modeling as a Tool for Trade and Development Theory

Timothy R Gulden

doi:10.18564/jasss.2129

Abstract

This paper makes use of an agent-based framework to extend traditional models of comparative advantage in international trade, illustrating several cases that make theoretical room for industrial policy and the regulation of trade. Using an agent based implementation of the Hecksher-Ohlin trade model; the paper confirms Samuelson's 2004 result demonstrating that the principle of comparative advantage does not ensure that technological progress in one country benefits its trading partners. It goes on to demonstrate that the presence of increasing returns leads to a situation with multiple equilibria, where free market trading policies can not be relied on to deliver an outcome which is efficient or equitable, with first movers in development enjoying permanent advantage over later developing nations. Finally, the paper examines the impact of relaxation of the Ricardian assumption of capital immobility on the principle of comparative advantage. It finds that the dynamics of factor trade are radically different from the dynamics of trade in goods and that factor mobility converts a regime of comparative advantage into a regime of absolute advantage, thus obviating the reassuring equity results that stem from comparative advantage.

Highlights

1.1 Of the many beautiful results that have emerged from economic theory over its long history, few are as elegant or have been as influential as Ricardo's principle of comparative advantage in international trade
We will use the model to illustrate the multiple equilibria in the face of increasing returns discussed by Gomory and Baumol
We will explore the impact of capital mobility in the increasing returns environment

Summary

Introduction

1.1 Of the many beautiful results that have emerged from economic theory over its long history, few are as elegant or have been as influential as Ricardo's principle of comparative advantage in international trade This principle is often taken to prove that all nations, regardless of their level of development or productivity, can only benefit from increased international trade. One critical assumption on which the comparative advantage argument depends is that there are constant or decreasing returns to scale in all industries. The relaxation of this assumption complicates analysis somewhat, leading to multiple equilibria and destroying the market's ability to deliver a unique outcome that can be considered to be "optimal" in some objective sense

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Conclusion