Trade and development in the world economy: Methodological features of Project DYNAMICO

Abstract

The paper reports on the methodological features and early application of the model underlying the DYNAMICO Projects, which has been developed at the United Nations Secretariat to study the interaction between trade and development. In order to investigate alternative development strategies, scenarios are calculated year by year for the global economy and the ten regions covered in the model. Each year is represented by a block-angular linear programming problem, where the systemwide (or coupling) constraints represent the world market clearance conditions for nine tradable commodities. Each subblock of relations represents the economy of a given region. The Dantzig-Wolfe decomposition method is used to solve the system. Section 2 reviews the specifications of a typical regional subproblem. Each regional subproblem contains the following material balances; labor, land, and capital requirements; investment functions; the most important macroeconomic definitions; and several other restrictions to simulate policy constraints concerning both domestic and external economic activity. Decomposition methods may, in general, be viewed as resource-allocation procedures valuable to capture some of the essential features of decentralized decision-making. In the literature, two classes of such resource-allocation procedures have been proposed: primal (relying on quantity signals), and dual (relying on prices). Section 3 discusses some of the theory underlying the Dantzig-Wolfe method, which is a price-directive one. Section 4 describes in detail the particular solution method implemented in the model. At first, in a prelink phase, each regional subproblem is solved a number of times on the basis of