How Reasonable Are Assumptions Used in Theoretical Models?: Computational Evidence on the Likelihood of Trade Pattern Changes / Lisandro Abrego, Raymond Riezman, John Whalley.

Format:

Book

Author/Creator:

Abrego, Lisandro.

Contributor:

National Bureau of Economic Research.

Riezman, Raymond.

Whalley, John.

Series:

Working Paper Series (National Bureau of Economic Research) no. w8169.

NBER working paper series no. w8169

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

How Reasonable Are Assumptions Used in Theoretical Models?

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2001.

Summary:

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.

Notes:

Print version record

March 2001.