Agent-based Computational Economics using NetLogo

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Model Specification 2. This model is implemented in NetLogo Wilensky , which handles the randomized agent activation regime i. The model can be downloaded from here. There are two types of agents: citizens and nations. Citizens are each associated with one nation and possess one unit each of labor and capital, which they choose to deploy in one of two national industries depending on which pays the higher wage or higher return to capital they may choose to work in one industry and invest in the other.

They use these wages and returns to demand goods. They calculate wages and returns to capital along with prices for each of the goods produced. When trade is enabled, they also engage in trade, importing more of a good if its price is lower in the other country and paying for these imports by bartering with goods from the industry where their price is lower. It also has a demand function. In each round, each agent does these things: Asks the nation for the current price of both wine and cloth. Asks the nation for the current wage in the industry where the agent works.

Asks the nation for the current return on capital in the industry where the agent has invested. This amounts to saying that each agent spends half of its income on each good - buying less and more of the good as the price goes up and down. With a small probability, the agent reexamines its job and investment choice, changing jobs or shifting its investment to the industry that provides the higher wage or return to capital. The low rate of turnover in employment and investment insures that the model is able to adjust to each change, thus avoiding stampedes from one industry to another that dramatically overshoot the required correction in the employment or investment level.

The price of cloth is adjusted upward by a small amount when demand for cloth exceeds its supply and down by a similar amount when supply exceeds demand. Because wages and returns on investment are calculated as shares of current production, Walras' law ensures that if the cloth market clears, the wine market will also clear. The price of cloth is a state variable.

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Cloth flows from the country in which its price relative to wine is lower to that where its price is higher, with compensation being made in wine according to the current price of cloth. When the international market is out of equilibrium i. The amount of cloth exported is increased by a small amount when the nation's partner has a higher relative price for cloth and is decreased by a small amount when the partner has a lower relative price for cloth.

This level of trade is the nation's final state variable. Determines the quantity of each good which it will produce using each industry's production function and the current level of employment and investment in each industry. Determines the wage for each industry by calculating the marginal product of labor in that industry by subtracting the current level of production from the production that would result from the addition of one additional unit of labor.

Determines the return to capital for each industry by subtracting the wage bill for that industry from the total output of the industry at current prices and dividing by the number of investors in the industry.

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Adjusts the price of cloth as described above. Adjusts the level of trade to reflect the new price level in both countries as described above. With capital mobility enabled, each investor examines not only the domestic industries, but also the foreign ones. The agent's investment is then placed with the industry that has the highest return to capital at the given time. As capital flows out of one industry and into another, the return to capital will increase in the first and decrease in the second.

This basic principle prevents all investors from flocking into the same industry. We now face the problem of where to count these returns. Should all returns be repatriated and used for consumption in the home nation of the investor, or should the returns be consumed or reinvested in the nation of investment? Modeling it well enough to make specific policy recommendations is a non-trivial task. We make a start, however, by providing a slider in the NetLogo interface that allows the user to examine the spectrum of possibilities, ranging from complete repatriation to entirely local consumption.

Results and Analysis 3. We will then use the model to illustrate the multiple equilibria in the face of increasing returns discussed by Gomory and Baumol. Finally, we will explore the impact of capital mobility in the increasing returns environment. Verifying the Model Against Samuelson's Analysis 3. Because our modeling approach is compatible with Samuelson's analysis, it is easy to translate his numbers into parameters that can be plugged into the agent model.

This demand function is identical for each agent. After rounds, both nations have established equilibrium production at 50 units of utility.

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At round , trading opens allowing the nations to import a good if its relative price is lower in the other country. This results in a major restructuring of each economy. As Samuelson's analysis indicates, Chinese utility jumps to , while US utility falls back to its previous autarkic level of After yet another rounds, trade is stopped and the model shows no major difference, thus demonstrating that these productivity levels produce trade terms that are functionally equivalent to autarky.

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Figure 1. In this case, we imagine a large citizen , industrialized nation and a smaller citizen "third world" nation that develops later. Once again we have two industries, but this time they are industries of a specific character.

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One is a basic agricultural industry that exhibits low productivity and decreasing returns to scale. The other is a high productivity industry - let's generically call it manufactures - that exhibits increasing returns to scale. We will assume that this industry exhibits increasing returns over its whole range of production. This gives the developing nation a comparative advantage in agriculture and the industrialized nation a comparative advantage in manufactures. For the first rounds, both countries produce and consume as best they can in autarky.

For the next rounds, the nations trade, both realizing gains because they are able to specialize in the area where they are relatively most efficient. In this case, the developing country drastically increases its productivity in manufactures from a paltry 0. At this point, however, we observe a marked contrast to Samuelson's giant increase in productivity: nothing happens.

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Any attempt to start such an industry is bound to fail because the industrialized country has attained a scale such that it can produce manufactures more cheaply than the developing nation - even given the developing nation's new, superior productivity at any given point on the production function.

In each round, the citizens and investors of the developing nation examine the feasibility of moving into manufactures, and in each round they find that they can do better by sticking to agriculture. The industrialized nation is thus able to retain the industry despite the fact that, all else being equal, it is no longer the most efficient producer in either absolute or relative terms.

If we cut off trade in this case, something even more surprising happens. After an initial plunge in utility, the developing country begins to restructure its economy. Where its manufactures had been unable to compete with cheap, mass produced imports in its domestic market, they are now the only game in town. Workers and investors begin to shift away from agriculture and into manufactures.

Initially, this sector is not terribly productive, but with experience and scale, it becomes more and more productive. In time, given the parameters we have chosen, the manufacturing sector becomes so productive that the small nation is actually able to do better in autarky than it previously did through trade!

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The newly industrialized country is now in a much stronger position to compete on the international market and sees a substantial gain. The larger, more established country actually looses more utility as a result of this trade over autarky. It is forced to restructure its economy to produce the lower productivity agricultural good. Because this good has decreasing rather than increasing returns, its productivity erodes as it becomes more specialized, leading to a long-term decline in income as compared to autarky.

Figure 2. In Samuelson's pre-development case, where the USA is more productive than China in both industries, but China is relatively more productive in wine and also more populous so as to create equivalent levels of total utility that increase with trade and specialization, capital mobility increases the utility of both nations.

With full repatriation of profits, Chinese investors move into US cloth creating lower cloth prices and considerable additional income in China. Both nations move from a utility of to a utility of Keeping income in the country where it is produced drives down prices yet further; this increases global utility slightly and strengthens demand for Chinese wine while simultaneously decreasing demand for US cloth. The result is that the US drops back to utils and China moves up to - this in spite of the fact that significant Chinese capital is generating goods and consumption in the USA.

With trade enabled, the US enjoys 50 utils and China as stated above. Enabling capital mobility with full repatriation produces a major shift of investment away from China to the US - which is still more efficient in absolute terms. This results in a very small increase in global utility - from to utils, but a huge boon to the US, which jumps from 50 to 95, and a blow to China, which drops from to The elimination of repatriation, in this case, makes only a small difference in utilities. The US falls from 95 to 92 and China grows from to Global utility increases by only about a single unit 3. In the Gomory-Baumol US and Ghana world described above, before Ghana has developed when it is relatively better in the decreasing returns good , we find that capital mobility drops its the utility from 28 to about 19, while increasing US utility from to as investment shifts to the more productive industry. Eliminating the repatriation of returns to capital offers a further boon to the US, raising its utility to about , but yields only about a single point of benefit to Ghana, moving it up to 20 utils.

Before allowing for mobile capital, we find US utility stabilizing around units, while Ghana utility has stabilized around 68 units. With full repatriation of returns on investment, mobility has only a minor impact on total world utility dropping it from to about , but a significant impact on each nation.

The US gains back some of its capacity in the increasing returns industry, growing to units, while Ghana loses some of its advantage—dropping back to 40 units. This is because Ghana's workforce was not large enough to capture the whole increasing returns industry. The US, though not as efficient as the hyper-developed Ghana, still had a significant wine industry, and when additional capital became available, this industry was able to offer a higher return due to its larger scale. Even though the gains from capital made by Ghanaian investors in the US are fully repatriated to Ghana, Ghana is hurt because reduced investment in Ghana depresses wages there.

Eliminating repatriation exacerbates these effects.

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Now US utility rises to about units, while Ghanaian utility drops further to about 35 units. Figure 3. Mobile capital with increasing returns in one industry without repatriation 3. In an industry with increasing returns, the nation with the larger industry will benefit from mobile capital. Under most conditions, global output will increase, but again, there will be winners and losers among nations. The story here is not the story of Ricardian comparative advantage where everyone benefits from greater mobility in goods.

When it comes to productive factors, there are times when nations would do well to hold on to as much as they can. When the developing nation attempts to build its increasing returns industry by shutting off trade, it is unable to attract investors to that industry because its partner nation is still offering better returns to investment because of its scale. Investment in the local industry only takes place if both trade and capital mobility are halted. Discussion 4.