FREE-TRADE AND ARMS RACES

To examine the effect of free trade between two potential political ri vals on their respective accumulation of weapons, the authors use a mo del in which utility maximization, the economics of trade and comparat ive advantage, production of weapons and consumption goods, depreciati on of weapons stocks, technological spillover from production to natio nal security, and the accumulation of capital are represented in an in finite horizon setting. In a neoclassical two-goods model of trade, ea ch actor specializes in producing the good of its comparative advantag e and engages in trade. Each country derives positive utility from con sumption and its own stock of weapons. The impact of the foreign count ry's weapons stock on the home country's utility is negative tin the c ase of rivals). The authors use dynamic optimization to show that whet her free trade leads to a rise or a decline in each country's stock of weapons relative to no trade depends on the relative marginal utiliti es of the consumption goods and weapons.