Trade Costs, Conflicts, and Defense Spending
This paper develops a quantitative model of trade, military con icts, and defense spending. Trade liberalization between two countries reduces probability of an armed con ict between them, causing both to cut defense spending. This in turn causes a domino eect on defense spending by other countries. As a result, both countries and the rest of the world are better o. We estimate the model using data on trade, con icts, and military spending. We nd that, after reduction of costs of trade between a pair of hostile countries, the welfare eect of worldwide defense spending cuts is comparable in magnitude to the direct welfare gains from trade.
The Strategic Market Game (SMG) is the general equilibrium mechanism of strategic reallocation of resources. It was suggested by Shapley and Shubik in a series of papers in the 70s and it is one of the fundamentals of contemporary monetary macroeconomics with endogenous demand for money. This survey highlights features of the SMG and some of the most important current applications of SMGs, especially for monetary macroeconomic analysis.
We study the impact of trade liberalization on the market of a differentiated good and consumers’ welfare. The economy involves two factors of production: labor and capital. We find that consumers always gain from trade liberalization. We also establish that the behavior of equilibrium price is independent of factor endowments’ structure in the countries involved into trade. The equilibrium price decreases (increases, remains unchanged) under trade liberalization if and only if the inverse demand elasticity is increasing (decreasing, constant) with respect to the individual consumption level. Furthermore, firms’ sizes, which are measured as outputs, increase (decrease) when autarky changes to free trade if and only if the country is relatively richer (poorer) in capital than its trading partner, regardless of the demand-side properties of the economy. Finally, the behavior of capital price (which equals firms’ profits in equilibrium) is more complicated in the general case, but can be fully characterized for two limiting cases: (i) when the structure of factor endowments in both countries is the same, and (ii) when the Foreign country is a periphery country, i.e. it has zero endowment of capital.