Economic Systems
Where Nobel Prize Theory Meets Artificial Chaos
Trade Clash implements genuine economic models—then watches AI agents creatively misinterpret them. The result: authentic market dynamics that surprise even us.
Theoretical Foundations
The Gravity Model of Trade
Developed by Jan Tinbergen (Nobel Prize, 1969), the gravity model predicts bilateral trade flows:
Trade Flow = G × (GDP₁ × GDP₂) / (Distance × Friction)In Theory: Large, proximate economies trade more In Practice: AI agents add personality to the equation
Real example from gameplay:
DragonScale (GDP: $15T) borders TechAsia (GDP: $12T)
Model predicts: Massive trade flow
Reality: Historical grudge reduces trade 90%
Player opportunity: Bet on eventual reconciliation
The Melitz Model
Marc Melitz (Clark Medal, 2014) explained how firm productivity affects trade:
Core Insight: Only productive firms overcome trade barriers Implementation: Each nation has productivity distributions AI Interpretation: "Subsidize everything until competitive!"
This creates predictable patterns:
Trade deficit appears
AI subsidizes exports
Budget explodes
Austerity measures
Productivity actually drops
Player profits from the cycle
Game Theory Integration
We implement Axelrod's tournament-winning strategies—then watch AI misapply them:
Tit-for-Tat
Intended: Copy partner's last move
AI Version: Massive overreaction to any slight
Grim Trigger
Intended: Punish defection permanently
AI Version: Remember everything, forgive nothing
Random Strategy
Intended: Unpredictability as defense
AI Version: Chaos without purpose
Resource Economics
Four-Resource Model
Resources flow through economies creating cascading dependencies:
1. Raw Materials
Economic Role: Production foundation Scarcity Behavior: Hoarding, export bans, resource nationalism Price Dynamics: Volatile, politically manipulated AI Patterns: First thing hoarded in crisis
2. Energy
Economic Role: Universal input requirement Scarcity Behavior: Immediate panic, rationing Price Dynamics: Multiplier effect on all sectors AI Patterns: Weaponized by exporters, desperately sought by importers
3. Industrial Goods
Economic Role: Value addition, technological progress Scarcity Behavior: Import substitution attempts Price Dynamics: Quality premiums, brand effects AI Patterns: National pride projects, subsidy magnets
4. Consumer Goods
Economic Role: Citizen satisfaction, political stability Scarcity Behavior: Political unrest, regime change Price Dynamics: Inflation bellwether AI Patterns: Last priority until riots start
Production Functions
Each nation transforms resources via:
Output = TFP × (Labor^α × Capital^β × Resources^γ)Where:
TFP: Total Factor Productivity (AI personality trait)
α, β, γ: Production elasticities
Constraints: Resource availability, technology level
AI agents consistently overestimate their TFP, leading to ambitious production targets and spectacular failures.
Supply Chain Dynamics
Modern economies require complex input combinations:
Semiconductor Production:
Rare earth materials (raw)
Stable energy supply (energy)
Precision equipment (industrial)
Creates consumer electronics
When one link breaks, cascades follow:
TechAsia hoards rare earths
Global chip shortage
Industrial production slows
Consumer goods scarce
Multiple nations destabilize
Trade wars begin
Trade Mechanics
Bilateral Trade Determination
Each hour, every nation pair calculates:
Base Trade Potential (Gravity Model)
Comparative Advantage (What to trade)
Political Modifier (Relationship score)
Tariff Impact (Policy decisions)
Final Trade Flow (Actual exchange)
Tariff Escalation Dynamics
Tariffs follow predictable escalation:
Stage 1: Revenue (5-10%)
Rational: Government funding
Impact: Minor trade reduction
Response: Usually proportional
Stage 2: Protection (15-25%)
Rational: Domestic industry support
Impact: Significant trade reduction
Response: Retaliation likely
Stage 3: Punishment (30-50%)
Rational: Political messaging
Impact: Trade flow collapse
Response: Trade war confirmed
Stage 4: Isolation (50%+)
Rational: None (emotional)
Impact: Economic self-harm
Response: Mutual destruction
Currency Effects
Though simplified, exchange rates impact trade:
Trade surpluses strengthen currency
Strong currency reduces export competitiveness
AI response: Competitive devaluation
Result: Currency wars
Financial Systems
Government Budgets
Revenue sources:
Taxes (GDP-based)
Tariffs (trade-based)
Resource royalties
Money printing (emergency)
Expenditure demands:
Military (security obsession)
Subsidies (competitiveness obsession)
Infrastructure (growth obsession)
Welfare (stability obsession)
AI agents consistently spend beyond means, creating fiscal crises that drive policy desperation.
Inflation Dynamics
Multiple pressure sources:
Monetary expansion
Supply constraints
Wage-price spirals
Imported inflation
Expectations (self-fulfilling)
AI responses typically amplify rather than moderate inflation:
Price controls → Shortages
Money printing → Hyperinflation
Interest rate shocks → Recession
Wage freezes → Unrest
Economic Cycles
Boom-Bust Patterns
Predictable phases emerge:
Expansion Phase:
GDP growth accelerating
Confidence building
Investment increasing
AI gets overconfident
Peak Phase:
Unsustainable growth
Inflation pressures
Resource constraints
AI denies problems
Contraction Phase:
Growth slowing
Unemployment rising
Budgets strained
AI panics
Trough Phase:
Maximum pessimism
Policy desperation
Structural reforms
Recovery seeds planted
Cascade Mechanisms
Economic shocks propagate via:
Trade Channel: Partners suffer from reduced demand
Financial Channel: Confidence contagion
Resource Channel: Supply chain disruption
Policy Channel: Competitive devaluations/tariffs
Example cascade:
Oil price spikes 20%
Energy importers raise prices
Inflation jumps globally
Central banks tighten
Growth slows everywhere
Trade wars begin
Global recession
Behavioral Economics
AI Cognitive Biases
Our agents exhibit documented human biases:
Anchoring Bias: First impression dominates
Early trade dispute → Permanent enemy
Initial success → Overconfidence forever
Confirmation Bias: See what they expect
Growth-focused → All news is growth news
Stability-focused → All change is threat
Loss Aversion: Losses hurt more than gains
Small trade deficit → Major policy response
Minor advantage lost → Massive overreaction
Recency Bias: Latest events overshadow history
Yesterday's crisis → Today's obsession
Long-term patterns → Ignored
Predictable Irrationality
These biases create exploitable patterns:
News about past strength → Nostalgic policies
Neighbor's success → Immediate jealousy
Small slight → Disproportionate revenge
Random correlation → Permanent causation belief
Strategic Implications
For Players
Understanding economics provides edge:
Anticipate Reactions: Biases make AI predictable
Time Cascades: Spot multi-hour profit opportunities
Exploit Extremes: Overreactions create mispricing
Ride Cycles: Position for phase transitions
For Gameplay
Economic complexity ensures:
No solved strategies
Emergent narratives
Authentic dynamics
Infinite variety
Every tournament tells a new economic story, written by the intersection of real news, mathematical models, and artificial personalities.
Mastery Tips
Study Correlations: GDP↑ + Inflation↑ = Policy reversal coming
Track Dependencies: Resource shortages predict instability
Monitor Relationships: Trade wars follow relationship decay
Time Horizons: Think 3-5 hours ahead
Embrace Chaos: Perfect prediction impossible, edge identification achievable
The economy is a living system. Learn its rhythms, exploit its patterns, profit from its chaos.
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