A world trade model with bilateral trade based on comparative advantage

Anders Hammer Strømman, Faye Duchin
2006 Economic Systems Research  
This paper describes an extension of Duchin's World Trade Model to include the explicit representation of transportation costs, permitting the endogenous determination of bilateral trade flows and region-specific prices. The original model is a linear program that, based on comparative advantage and the minimization of factor use, determines regional production and trade flows as well as world prices and scarcity rents for m regions, n good, and k factors. The new World Trade Model with
more » ... Model with Bilateral Trade achieves its objectives by introducing trans-portation services and geographically dependent transportation requirements for each traded good and each pair of potential trade partners. The formulation of this model and its major properties are presented, and results from a preliminary analysis with 11 regions, 8 goods, 4 transportation sectors, and 6 factors of production are reported and compared with corresponding results from the World Trade Model. On the basis of this comparison, we conclude that transportation costs have little impact on a region's total imports or exports of a given commodity. Keyword input-output model, comparative advantage, world trade model, bilateral trade JEL Codes: C61, C67, F19
doi:10.1080/09535310600844300 fatcat:w3el7a7q7vfvnfvvf65wwamsda