A hydrodynamic model for cooperating solidary countries

TL;DR

This paper introduces a hydrodynamic model to simulate international trade between two countries, reproducing classical trade theory results and exploring the role of money in shaping trade patterns.

Contribution

It presents a novel hydrodynamic framework for modeling trade between cooperative countries, extending classical theories with a dynamic, flow-based approach.

Findings

Model reproduces classical comparative advantage results

Incorporating money influences trade flow patterns

Discusses advantages and limitations of the hydrodynamic approach

Abstract

The goal of international trade theories is to explain the exchange of goods and services between different countries, aiming to benefit from it. Albeit the idea is very simple and known since ancient history, smart policy and business strategies need to be implemented by each subject, resulting in a complex as well as not obvious interplay. In order to understand such a complexity, different theories have been developed since the sixteenth century and today new ideas still continue to enter the game. Among them, the so called classical theories are country-based and range from Absolute and Comparative Advantage theories by A. Smith and D. Ricardo to Factor Proportions theory by E. Heckscher and B. Ohlin. In this work we build a simple hydrodynamic model, able to reproduce the main conclusions of Comparative Advantage theory in its simplest setup, i.e. a two-country world with country A and country B exchanging two goods within a genuine exchange-based economy and a trade flow ruled only by market forces. The model is further generalized by introducing money in order to discuss its role in shaping trade patterns. Advantages and drawbacks of the model are also discussed together with perspectives for its improvement.