Modelling Interregional and International Trade Using Information Theory

Abstract

A systems model for the short to medium-term analysis of interregional and international trade is formulated and discussed. The model embodies elements of information theory and general equilibrium/disequilibrium analysis within an iterative framework. Three major components which form separate submodels deal with (i) the prediction of trade flows, (ii) the prices and costs of the traded goods, and (iii) world market adjustments in the short run. These three submodels are interactive, and a distinctive feature of the resulting formulation is the appearance of identical (embedded) constraints in the price and quantity submodels. Information theory provides a practical means of considering trade barriers, zones of preference (under bilateral trade agreements) and other factors relating to the terms of trade, as well as various theoretical assumptions which may warrant investigation. The result is an extremely versatile vehicle for trade modelling in situations where the availability of trade data is limited.