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

Author

Listed:
  • 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.

Suggested Citation

  • Lisandro Abrego & Raymond Riezman & John Whalley, 2001. "How Reasonable Are Assumptions Used in Theoretical Models?: Computational Evidence on the Likelihood of Trade Pattern Changes," NBER Working Papers 8169, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:8169
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    File URL: http://www.nber.org/papers/w8169.pdf
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    References listed on IDEAS

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    1. Raymond RIEZMAN, 2013. "Customs Unions and the Core," World Scientific Book Chapters,in: International Trade Agreements and Political Economy, chapter 3, pages 33-43 World Scientific Publishing Co. Pte. Ltd..
    2. John Kennan & Raymond Riezman, 2013. "Optimal Tariff Equilibria with Customs Unions," World Scientific Book Chapters,in: International Trade Agreements and Political Economy, chapter 5, pages 53-66 World Scientific Publishing Co. Pte. Ltd..
    3. Syropoulos, Constantinos, 1999. "Customs Unions and Comparative Advantage," Oxford Economic Papers, Oxford University Press, vol. 51(2), pages 239-266, April.
    4. Berglas, Eitan, 1979. "Preferential Trading Theory: The n Commodity Case," Journal of Political Economy, University of Chicago Press, vol. 87(2), pages 315-331, April.
    5. Kehoe, Timothy J, 1980. "An Index Theorem for General Equilibrium Models with Production," Econometrica, Econometric Society, vol. 48(5), pages 1211-1232, July.
    6. John Kennan & Raymond Riezman, 2013. "Do Big Countries Win Tariff Wars?," World Scientific Book Chapters,in: International Trade Agreements and Political Economy, chapter 4, pages 45-51 World Scientific Publishing Co. Pte. Ltd..
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    Cited by:

    1. Edgar Cudmore & John Whalley, 2005. "Border Delays and Trade Liberalization," NBER Chapters,in: International Trade in East Asia, NBER-East Asia Seminar on Economics, Volume 14, pages 391-406 National Bureau of Economic Research, Inc.
    2. Whalley, John, 2005. "Pitfalls in the Use of Ad valorem Equivalent Representations of the Trade Impacts of Domestic Policies," Commissioned Papers 24164, Canadian Agricultural Trade Policy Research Network.
    3. Whalley John & Yu Jun & Zhang Shunming, 2012. "Trade Retaliation in a Monetary-Trade Model," Global Economy Journal, De Gruyter, vol. 12(1), pages 1-29, March.

    More about this item

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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