How Reasonable are Assumptions Used in Theoretical Models?: Computational Evidence on the Likelihood of Trade Pattern Changes
University of Warwick - Department of Economics & Centre for the Study of Globalisation and Regionalisation; International Monetary Fund (IMF)
Raymond G. Riezman
University of Iowa - Henry B. Tippie College of Business - Department of Economics; GEP; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)
University of Western Ontario - Department of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute for Economic Research); Centre for International Governance and Innovation (CIGI)
NBER Working Paper No. w8169
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.
Number of Pages in PDF File: 14working papers series
Date posted: March 16, 2001
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