The Treatment of International Trade in Global Models

Nagy, A. (1983). The Treatment of International Trade in Global Models. IIASA Working Paper. IIASA, Laxenburg, Austria: WP-83-025

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Abstract

This paper is a critical survey of the treatment of international trade in global models, concentrating on what--in the author's opinion--is wrong with it.

After a brief review and classification of the different ways in which international trade relations are treated in global models, the neglect of bilateral trade relations is criticised on the grounds that it assumes more freedom in trading relations than there actually is. In the next section the common assumption that trade is demand-determined is questioned; it is argued that the exporters' "push" is at least as important as the importers' "pull" in determining bilateral trade flows. Section 5 raises the question: do trade balances approach zero in the long run, as many policy makers and model builders seem to believe? The author suggests that there is hardly any basis for this belief.

The role of relative prices is discussed in the next section, where it is shown that they provide no explanation of changes in market shares, and that export prices cannot be assumed to move in parallel with cost changes in different countries. Section 7 draws attention to the relative lack and unreliability of foreign trade price data: the "unit values" which can be observed tell us little about prices and it is hard to convert the domestic price statistics into comparable national export price indices.

The final section of the paper discusses different ways in which the structure of an international trade system can be defined, and presents a method by which the effects of trade policy and economic distance can be measured independently of changes in the volume of world trade and the changing shares of different countries in world trade. The usefulness of this kind of analysis in demonstrating the historical effects of trade policies is illustrated by means of some simple examples.

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