A World Trade Model with Bilateral Trade Based on Comparative Advantage

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 &degree;ows 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 &degree;ows as well as world prices and scarcity rents for m regions, n goods, s transportation sectors, and k factors. The new World Trade Model with Bilateral Trade achieves its objectives by introducing transportation 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.