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THE BASIC LAWS OF TRADE

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Abstract

According to the theory of comparative advantage of David Ricardo and Ohlin-Heckscher, countries with different resources and technology will benefit from trading, regardless of competitiveness. This is the core theory in international trade. However, in the real world, this theory does not always work. Some countries may gain from trading, some may not, and some may even lose. The total gain for all parties is also not optimal. We hypothesize another basic law that could fix this problem. This law is more basic than the comparative advantage. The theory of comparative advantage stands on this basic law. When the basic law is met, then comparative advantage theory works well, i.e. countries with different resources and technology will benefit from trading, regardless of competitiveness and cost. The total gain for all parties is optimal. We made trade simulations 2x2 and 5x20 to demonstrate the workability of this hypothesis.

Version notes

We shorten and clarify the presentation We expand the simulation into comparative advantage and trade

Content

Thumbnail image of The basic laws of trade - version2.pdf

Supplementary material

Thumbnail image of Comparative adgantage and trade simulation 5x20 model.xlsx
Comparative advantage and trade simulation 5x20 model
We simulated 5 countries, namely China, South Korea, Indonesia, Turkiye, and India. Each country produces and consumes 20 products, namely A, B, C, D, E, F, G, H, I, J, K, L, M, N, O, P, Q, R, S, and T. The production costs of each product in each country are random with a range in their respective national currencies (China between 60 – 120 Chinese yuan, South Korea between 12,000 – 24,000 Korean Won, Indonesia between 145,000 – 290,000 Indonesian rupiahs, Turkiye between 170 – 340 Turkish lira, and India between 930 – 1860 Indian rupees). We assume that all goods can be traded (tradable) between countries. All countries can trade to get goods at a lower cost and larger market. We use 3 types of exchange rates to compare the results, namely the true exchange rate and misaligned 1 and 2.

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