Agent-Based Modeling as a Tool for Trade and Development Theory

Abstract

This paper makes use of an agent-based framework to extend traditional models of comparative advantage in international trade, illustrating several cases that make theoretical room for industrial policy and the regulation of trade. Using an agent based implementation of the Hecksher-Ohlin trade model; the paper confirms Samuelson's 2004 result demonstrating that the principle of comparative advantage does not ensure that technological progress in one country benefits its trading partners. It goes on to demonstrate that the presence of increasing returns leads to a situation with multiple equilibria, where free market trading policies can not be relied on to deliver an outcome which is efficient or equitable, with first movers in development enjoying permanent advantage over later developing nations. Finally, the paper examines the impact of relaxation of the Ricardian assumption of capital immobility on the principle of comparative advantage. It finds that the dynamics of factor trade are radically different from the dynamics of trade in goods and that factor mobility converts a regime of comparative advantage into a regime of absolute advantage, thus obviating the reassuring equity results that stem from comparative advantage.

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