A SIMPLE MICRO SIMULATION
MODEL EXAMPLE: Cost chain and
trading price formation in
international trade
Master Économie et Affaires Internationales
Cours “Modèles de Simulation”
Paris Dauphine –October 2009
Prof. Ramón Mahía
Applied Economics Department
www.uam.es/ramon.mahia
A SIMPLE MICRO
SIMULATION MODEL
EXAMPLE
INTRODUCTION
When a trader decides to export a good, lots of decisions must
be taken, from “fundamentals” to minor details:

How to pack, store and label the goods, were to export, which
is the best port of origin, which route is the best for inland
transport, which is the optimum route for international freight,
which is the best insurance option and dealer, which transport
company is the best (both inland and international),which
INCOTERM is convenient and standard to reach and
agreement…….

A SIMPLE MICRO
SIMULATION MODEL
EXAMPLE
THE NEED OF A SIMULATION TOOL
The amount of different choices in every matter produce lots of
different eventual combinations that carry out different results: we
need a kind of evaluation tool.

All these decisions are extremely inter – connected in a way that
makes too complex to take isolate step by step decisions: we need
a kind of optimization instrument.

To many “agents” are involved in the process that may change the
(their) trade conditions rapidly and frequently forcing us to re thinking our decisions and re compute costs: we need a kind of
technical and fast tool for handing out changes in new
solutions.


….. MAY BE WE NEED A SIMULATION MODEL
A SIMPLE MICRO
SIMULATION MODEL
EXAMPLE
Previous
Manipulation
•Packing
•Labeling
DECISIONS AND COST CHAIN (I)
Export
arrangements
Inland Transport
•Export agent, brokerage
•Permissions
•Certifications
•Custom arrangements
•Route
•Mean of transport
•Transport company
•Insurance conditions
Storage and loading
•Surveillance
•Packing
•Loading conditions
International Transport
•Country
•Mean of transport
•Port of destination
•Route
•Carrier
•Insurance conditions
Import arrangements
Downloading and
store at destination
•Surveillance
•Downloading conditions
•Custom clearance
•Tariffs / Duties
•Importer agent brokerage
Inland Transport
•Route
•Mean of transport
•Transport company
•Insurance conditions
A SIMPLE MICRO
SIMULATION MODEL
EXAMPLE
Previous
Manipulation
•Packing
•Labeling
DECISIONS AND COST CHAIN (II)
Inland Transport
Export
arrangements
•Route
•Export agent, brokerage
•Permissions
•Certifications
•Custom arrangements
•Mean of transport
•Transport company
Storage and loading
•Surveillance
•Packing
•Loading conditions
•Insurance conditions
International Transport
•Carrier
•Country
•Insurance conditions
•Mean
•Port of destination
•Route
Downloading and
store at destination
•Surveillance
•Downloading conditions
Inland Transport
•Route
Import arrangements
•Custom clearance
•Tariffs / Duties
•Importer agent brokerage
•Mean of transport
•Transport company
•Insurance conditions
A SIMPLE MICRO
SIMULATION MODEL
EXAMPLE
TRADE AGREEMENT: INCOTERMS (I)
Incoterms
(International
Commercial
Terms):
Standard definitions of international trade terms widely
used used in international commercial transactions to
divide transaction costs and responsibilities between
buyer and seller, reflecting state-of-the-art transportation
practices

INCOTERMS 2000 http://www.iccwbo.org/incoterms/id3040/index.html
•Group E – Departure: EXW
•Group F – (Main Carriage Unpaid By Seller):FCA , FAS , FOB
•Group C – (Main Carriage Paid By Seller): CFR , CIF , CPT , CIP
•Group D – Arrival: DAF, DES ,DEQ, DDU, DDP
A SIMPLE MICRO
SIMULATION MODEL
EXAMPLE
TRADE AGREEMENT: INCOTERMS (II)
A SIMPLE MICRO
SIMULATION MODEL
EXAMPLE
TRADE AGREEMENT: INCOTERMS (III)
A SIMPLE MICRO
SIMULATION MODEL
EXAMPLE

BASIC ELEMENTS OF A THE SIMPLE
SIMULATION MODEL
PURPOSE OF THE MODEL:
Evaluate the total and unitary cost of exporting a given
good to a given destination country for different choices of
packing, routes, carriers, and INCOTERMS.

And then, as a result, support the pricing decision of the
exported good and the estimation of margins available for
different alternatives in an imported price is previously
negotiated.

Observe in a detailed and relative way (comparing costs)
the cost formation chain (markup of different agents) helping
decisions in terms of negotiations and cost saving optimization.

A SIMPLE MICRO
SIMULATION MODEL
EXAMPLE

BASIC ELEMENTS OF A THE SIMPLE
SIMULATION MODEL
Pure decision INPUTS:
Factory Price
Units to export
Type of packaging and labeling
Type of international freight (Plane, Ship)
 (Partially conditioned) Port of origin
 (Partially conditioned) Carrier for international freight


Exogenous INPUTS:
Cost of packaging for each of the types, warehouse storage and services
cost, cost of loading charges at point of origin, export agent fees, cost of export
documentation, cost of inland road transportation, distances to different ports
of destination, forwarding fees for different ports, cost of loading in different
ports, number of carriers available, cost of international freight for 4 different
carriers, availability of carriers in different locations, cost of international
insurance, import duties and tariffs, destination port forwarding costs and
inland transport in destination country.

Main final OUTPUTS: Total and per- unit cost of the product for
the different stages of the price (cost) formation chain.

A SIMPLE MICRO
SIMULATION MODEL
EXAMPLE
QUESTIONS THAT CAN BE ASWERED
Which is the total, and per - unit cost connected to the main
different stages to be accomplished in an export operation?
 Which are the relative importance of these the different costs
chapters?
 Which are the sensibility of each of the cost chapters for different
means of transport, points of origin, routes or carriers?
 Which is the cost - level price for the different INCOTERMS?

Which is the minimum number of units to export for reaching the
minimum fixed unit price?
Which is the best choice of inland and international transport
routes and carriers for a given INCOTERM?.

A SIMPLE MICRO
SIMULATION MODEL
EXAMPLE

FROM SIMPLICITY TO REALISM
Real decisions are evaluated in a “multilevel” basis:
Different countries of destination, different types of products to export
(eventually with common stages in the export process), transport can be
multimodal, more alternatives for transport and insurance (points of origin, but
overall, lots of companies)….

Lots of additional inputs (costs) should be considered: excess of
supply or domestic demand, financial services costs and
availability, market research costs, solvency studies of buyers,..

Final cost is not the only OUTPUT of real interest: TIME use to be
crucial (as intermediate input and as a CRUCIAL final output)

Lots of intermediate inputs and exogenous variables are much
more difficult to measure. For example, there are lots of price
alternatives depending on size, quantity, value and a high degree
of negotiation.

Some critical inputs or outputs are not measurable at all
(expertise of a given trade channel, evaluation of the risk of failure,
quality of exporting services)
