The world model of merchandise trade as presently specified1 focuses primarily on the impact of levels of economic activity in the industrial countries on their foreign trade balances, although the effects of changes in relative prices are also considered. Raw material and fuel imports and transactions in manufactured goods are especially important in the trade of these countries, and the determinants of these flows, as well as those of agricultural goods, are quite distinct. As a result, the model distinguishes between these four types of commodity flows but pays particular attention to the determinants of trade in fuels, raw materials, and manufactured goods.
The model thus far has been used mainly for simulations. The data requirements for simulations are typically smaller than for forecasts, since estimates for all exogenous variables for the forecast period are not required. Simulation does not deal with what is likely to happen, but rather with what would happen under alternative sets of exogenous model inputs. It is useful in analyzing the “normal” effect of certain policy changes or certain exogenous disturbances on the endogenous variables in the model, since it is possible to hold other variables constant. The magnitude of these impacts can be studied to see whether they appear realistic, and partial multiplier tables can be constructed for simple model applications. Because of their relative simplicity compared with forecasting applications, and because of the insight they provide to the reasonableness of the model’s structure and coefficients, this paper focuses on the results of model simulations. In Section I the structure of the model is reviewed, and certain new relationships that are needed for simulations and forecasting are given. Simulations of the effects of changes in activity levels are described in Section II, and simulations of terms of trade effects are presented in Section III. Finally, in Section IV the paper is summarized and suggestions for further work to enhance the simulation capabilities of the model are considered.