Trade and Development between Similar Economies: Theoretical Modeling and Simulation

Abstract

This paper attempts to model the link between trade and development between countries with similar factor endowments and proposes a new kind of stable equilibrium in the intermediary sector of the economies. The data were elicited through simulation using Microsoft Excel 2010. The results arrived at were archived empirically using theoretical modeling and simulation. The results derived show that when a country has monopoly power in the production of intermediate goods, there is a possibility of gain in trade and exchange, and therefore, it is a win-win situation for all countries with similar factor endowments, other things being equal. The results also showed that the profits that emerged in the intermediate goods sector were positive. The results indicated that profits are generated from both domestic and foreign demand, especially from the country ’ s monopoly power in the production of intermediate goods. Lastly, the study also demonstrated that capital formation and the injection of liquidity into the regulated economy are efficient, and by assuming that households’ consumption at each point in time is efficient, the control of money supply and prices were found to be a necessary condition for countries with similar characteristics to converge towards stationary equilibrium. Based on the findings, it is recommended that intensification of trade in intermediate goods is a necessary policy for development policies for CEMAC and ECOWAS, where monopoly power and the control of money supply and prices are essential for equilibrated, stable growth.