How Reasonable Are Assumptions Used in Theoretical Models?: Computational Evidence on the Likelihood of Trade Pattern Changes
Lisandro Abrego, Raymond Riezman, John Whalley
NBER Working Paper No. 8169
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.
Published: 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.