Strategic Market Games and Ricardo

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Abstract

We develop a Ricardian market game to show that in non-Walrasian economies, the Law of Comparative Advantage (LCA) à la Ricardo-Haberler (1817; 1936) can fail. Trade is driven, not by comparative advantages, but by strategic behaviour. This leads to a new and somewhat surprising result: it is shown in a Ricardian economy that at equilibrium, by both exporting and importing goods in which they have a comparative disadvantage, countries can Pareto improve on when they specialise as per the LCA, which in turn Pareto dominates autarky.
Original languageEnglish
JournalEconomics Bulletin
Volume37
Issue number4
Publication statusPublished - 19 Nov 2017

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Comparative advantage
Strategic market games
Pareto
Importing
Strategic behavior
Disadvantage
Market games
Exporting

Bibliographical note

The Economic Bulletin is an open-access letters journal.

Keywords

  • Shapley-Shubik Market Games
  • Endogenous commodity-price formation
  • Comparative Advantage
  • JEL: D5 - General Equilibrium and Disequilibrium: General
  • C7 - Game Theory and Bargaining Theory:General

Cite this

Strategic Market Games and Ricardo. / Toraubally, Waseem.

In: Economics Bulletin, Vol. 37, No. 4, 19.11.2017.

Research output: Contribution to journalArticle

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AB - We develop a Ricardian market game to show that in non-Walrasian economies, the Law of Comparative Advantage (LCA) à la Ricardo-Haberler (1817; 1936) can fail. Trade is driven, not by comparative advantages, but by strategic behaviour. This leads to a new and somewhat surprising result: it is shown in a Ricardian economy that at equilibrium, by both exporting and importing goods in which they have a comparative disadvantage, countries can Pareto improve on when they specialise as per the LCA, which in turn Pareto dominates autarky.

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