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A Trade Network Theory

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  • Hübler, Michael

Abstract

This paper introduces a new trade model type. It combines the gravity model, well-known in international economics, with network theory. With this approach, complicated trade networks can be algebraically solved in form of systems of linear (differential) equations. Business cycles and productivity shocks can be represented via complex numbers or the Laplace transformation. With the help of this model, new mechanisms of international trade are identified. Four theoretical examples with numerical applications are presented. First, it is demonstrated how an increase in trade from Asia to North America affects the world economy. Second, an intuitive rule for finding the welfare-optimal tariff is derived. Third, three possibilities for vanishing trade effects (fluctuations) are explained: trade diversion, the "river-island effect", and overlapping business cycles. Fourth, it is shown how adjustment costs delay the propagation of shocks or business cycles.

Suggested Citation

  • Hübler, Michael, 2015. "A Trade Network Theory," Hannover Economic Papers (HEP) dp-553, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
  • Handle: RePEc:han:dpaper:dp-553
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    international trade; gravity model; network theory; business cycles; propagation of shocks;
    All these keywords.

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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