Trade as an optimization problem

In summary, the conversation discusses the concept of protectionism and its effects on the global economy. The participants consider an optimization problem where both countries want to optimize their own spending while still benefiting from trade. They also bring up the idea of a prisoner's dilemma and the potential benefits of lowering trade barriers. The conversation ends with a discussion on estimating constants and the objective function in relation to trade.
  • #1
John Creighto
495
2
Protectionism is often viewed as positive for the country that implements the protectionism but bad globally due to losses of efficiency and miss allocation of resources. Because protections measures are often met with counter protectionist measures countries try to trade freely and fairly for the mutual benefit of all.

I kind of wondered what this might look like as an optimization problem. A good local approximation that might have these characteristics is:

J1=C11 a+ C12 sqrt(ab)
J2=C21 b+ C22 sqrt(ab)

Where “a” is the money spent in country one. “b” is the money spent in country two. Cm,n are constants that may depend on “a” and “b”. Country one wants to optimize J1 and country two wants to optimize J2. The term “sqrt(ab)” represents the productivity gains from trade.

Now if both countries try to keep their own spending in their own country then they lose the productivity gains and the world suffers. The optimization is interesting because if they each try to optimize independently of each other they will not obtain the optimal trade and will be poorer as a result. However, if the trade is disproportional then there is a possibility that they could suffer worse then had their been no trade.
 
Physics news on Phys.org
  • #2
John Creighto said:
Cm,n are constants that may depend on “a” and “b”.

Then they're not constants, and you really have the much broader
J1=f1(a, b)
J2=f2(a, b).

I think a useful model for trade would be more of a prisoner's dilemma: if one side implements protectionist measures that side benefits, as long as the other does not retaliate. But both countries lowering barriers makes both better off.
 
  • #3
CRGreathouse said:
Then they're not constants, and you really have the much broader
J1=f1(a, b)
J2=f2(a, b).

I think a useful model for trade would be more of a prisoner's dilemma: if one side implements protectionist measures that side benefits, as long as the other does not retaliate. But both countries lowering barriers makes both better off.

Hmmm...sounds interesting.

Yes if the constants are not really constant then the above expression takes the general form you gave. However, if they are roughly constant over some region then we can estimate the constants. The constants Ck,1 Show the benefit of the money spent locally while Ck,2 show the mutual benefit from each others prosperity. If Ck,2>Ck,1 then trade more trade would be mutually beneficial and if Ck,1>Ck,2 then less trade would be mutually beneficial. While more trade is generally mutually beneficial, if something in the economy changes (say the price of fuel) then a certain amount of rebalancing might be required.

To estimate the constants one would need to define the objective function. One possible objective function could be really GDP. Also if one could try to take allowance for more subjective costs in the objective function such as environmental degradation or supporting over seas despots.
 
  • #4
John Creighto said:
However, if they are roughly constant over some region then we can estimate the constants.

Ah, now I understand you. I think you can see where my confusion came from...

John Creighto said:
If Ck,2>Ck,1 then trade more trade would be mutually beneficial and if Ck,1>Ck,2 then less trade would be mutually beneficial.

Hmm? That doesn't seem to fit your model.
 
  • #5
CRGreathouse said:
Ah, now I understand you. I think you can see where my confusion came from...



Hmm? That doesn't seem to fit your model.

Yea your right. I guess I should fix that by making a and b the goods traded instead of the money spent. Although the way I have it now it is still interesting. The way it is now explores the idea of mutual prosperity vs mutual poverty. Are we richer when our neighbors our poor or poorer when our neighbors are rich?
 

Related to Trade as an optimization problem

1. What is the concept of trade as an optimization problem?

Trade as an optimization problem refers to the process of making decisions about what and how much to trade in order to maximize benefits or minimize costs. It involves weighing various factors such as supply, demand, prices, and risks to determine the most efficient and beneficial trade strategy.

2. How is trade as an optimization problem different from traditional trade theory?

Traditional trade theory focuses on the concept of comparative advantage, where countries specialize in producing and exporting goods that they have a lower opportunity cost for. Trade as an optimization problem takes into account a wider range of factors and considers the optimization of benefits and costs, rather than just specializing in one area.

3. What are the main challenges in using trade as an optimization problem approach?

One of the main challenges is gathering accurate and up-to-date data on supply, demand, and other relevant factors. Another challenge is accurately predicting market trends and risks. Additionally, there may be conflicting objectives among different stakeholders, making it difficult to find a solution that satisfies all parties.

4. How does technology play a role in trade as an optimization problem?

Technology has greatly influenced trade as an optimization problem by providing tools and methods for data analysis and decision-making. With advanced technology, it is easier to gather and analyze large amounts of data, make more accurate predictions, and automate certain parts of the trade process.

5. What are the potential benefits of using trade as an optimization problem approach?

The potential benefits include increased efficiency and profitability, improved decision-making based on data and analysis, reduced risks, and a better understanding of market trends. It can also lead to more sustainable and equitable trade practices, as all factors and stakeholders are taken into consideration.

Similar threads

Replies
6
Views
1K
  • General Discussion
Replies
3
Views
6K
  • Calculus and Beyond Homework Help
Replies
4
Views
1K
  • General Discussion
Replies
15
Views
3K
  • General Discussion
Replies
1
Views
9K
  • Art, Music, History, and Linguistics
Replies
1
Views
1K
Replies
20
Views
10K
  • General Discussion
Replies
9
Views
3K
  • Mechanics
Replies
1
Views
2K
Back
Top