Adaptive Agent-Based Simulations of Global Trade

To examine the strategies of nations participating in the global economy, an agent-based mathematical model was developed and implemented as a parallel algorithm using communicating processes. Each process represents a nation and contains five sub-processes which model the negotiations between nations. Based on Ricardian comparative advantage theory, a series of equations were derived determining all necessary factors affecting trade partner selection and trade levels. A discrete algorithm for each nation to use was designed utilizing these equations. Trade negotiations were modeled as two player games with offers and acceptances. Each agent was given the goal of maximizing its one step utility increase based on a Cobb-Douglas utility function and current commodity levels. The model was verified by running multiple simulations and varying initial parameters. While the expected relationship between quantity of trade and utility increase did not occur, there was a significant relationship between number of trades and specialization. Nations chose a product that they could produce easily and used their comparative advantage to trade for other goods. By redesigning the process where exchange of goods takes place and including a more detailed production function, we expect to see utility increase correspond to levels of trade. 1. Statement and Overview Modern international trade theory is based upon a publication by David Ricardo and has endured since 1817. This publication established the law of comparative advantage, which expanded upon the absolute advantage theory proposed by Adam Smith. In Smith’s theory, it was asserted that if one nation were more efficient in the production of one good and less efficient in the production of a second commodity, mutually beneficial trade would be made possible by specialization. A nation could specialize in and export the good in which it has an absolute advantage. Ricardo refined this theory and proved that even if one nation is more efficient in the production of both goods than another nation, there could still be mutually beneficial trade. This nation could export the good in which its efficiency advantage was larger and import the good in which its advantage is smaller. The former commodity is referred to as the good in which the nation has a comparative advantage. Ricardo based his theory upon the labor theory of value, which asserts that the price of a commodity is fully dependent on the amount of labor needed for production. For this implication to hold, it must be true that labor and capital intensities are equivalent across the production of all commodities and all labor must be homogeneous. This is not the case in real markets, so the law of comparative advantage must be established via another basis. One such basis is opportunity cost theory. Using this approach, the cost of a commodity can be stated in terms of the amount of another commodity that must be given up in order to create enough resources to produce an additional unit of the first commodity. It then follows that a nation has a comparative advantage in a good when its opportunity cost to produce the commodity is lower than the second country’s.This theory will be the foundation of our mathematical model of international trade. Utilizing the opportunity cost theory, the terms of trade that offer mutually beneficial outcomes can easily be established with the knowledge of the production possibility frontier, which shows the different combinations of two goods that can be produced using all of the available resources (for details, see following section and appendix). For the feasibility of the model, it will be assumed that opportunity costs are