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How Reasonable Are Assumptions Used in Theoretical Models?: Computational Evidence on the Likelihood of Trade Pattern Changes

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  • Lisandro Abrego
  • Raymond Riezman
  • John Whalley

Abstract

This paper seeks to contribute to discussion of the reasonableness of sometimes seemingly innocent assumptions used in theoretical trade models that the direction of trade is both predetermined for each good for each country and fixed. Here, we provide computational evidence as to the reasonableness of this assumption. We consider a simple three-country, three-good, pure-exchange model with CES preferences. We compute free trade competitive equilibria, three-country non-cooperative Nash equilibria, and customs union equilibria for randomized parameterizations, and find that trade patterns change in around 35% of the cases between free trade and customs union equilibria. In three-country Nash and customs unions comparisons trade patterns change roughly 40% of the time. We evaluate alternative cases, including with different numbers of randomizations in the parameter space. Results remain robust, reinforcing our conclusion that the assumption of unchanged trade pattern changes, common in theoretical analysis, does not have firm numerical support in the cases we consider.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8169.

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Date of creation: Mar 2001
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Publication status: published as Abrego, Lisandro, Raymond Riezman and John Whalley. “How Reasonable are Assumptions Used in Theoretical Models? Computational Evidence on the Likelihood of Trade Pattern Changes." Canadian Journal of Economics 39, 3 (August 2006): 781-789.
Handle: RePEc:nbr:nberwo:8169

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  1. Berglas, Eitan, 1979. "Preferential Trading Theory: The n Commodity Case," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 87(2), pages 315-31, April.
  2. Syropoulos, Constantinos, 1999. "Customs Unions and Comparative Advantage," Oxford Economic Papers, Oxford University Press, vol. 51(2), pages 239-66, April.
  3. Kehoe, Timothy J, 1980. "An Index Theorem for General Equilibrium Models with Production," Econometrica, Econometric Society, Econometric Society, vol. 48(5), pages 1211-32, July.
  4. John Kennan & Raymond Riezman, 1990. "Optimal Tariff Equilibria with Customs Unions," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 23(1), pages 70-83, February.
  5. Riezman, Raymond, 1985. "Customs unions and the core," Journal of International Economics, Elsevier, Elsevier, vol. 19(3-4), pages 355-365, November.
  6. Kennan, John & Riezman, Raymond, 1988. "Do Big Countries Win Tariff Wars?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(1), pages 81-85, February.
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Cited by:
  1. Whalley John & Yu Jun & Zhang Shunming, 2012. "Trade Retaliation in a Monetary-Trade Model," Global Economy Journal, De Gruyter, De Gruyter, vol. 12(1), pages 1-29, March.
  2. Edgar Cudmore & John Whalley, 2003. "Border Delays and Trade Liberalization," NBER Working Papers 9485, National Bureau of Economic Research, Inc.
  3. Whalley, John, 2005. "Pitfalls in the Use of Ad valorem Equivalent Representations of the Trade Impacts of Domestic Policies," Commissioned Papers, Canadian Agricultural Trade Policy Research Network 24164, Canadian Agricultural Trade Policy Research Network.

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