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A Theory of Monetary Exchange

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  • Alfred Lorn Norman

Abstract

The transactions cost for alternative exchange mechanisms for the household exchange problem can be characterized by the computational complexity of the exchange process. The computational complexity for any exchange mechanism is at least nH, where n is the number of goods and H is the number of households. Imposing the conditions of conservation, nonnegativity and quid pro quo results in a command exchange mechanism whose computational complexity is nH. Multiparty barter exchange, formalized using graph theory, has computational complexity equal to the minimum of (nH2, n2H). Introducing an auxiliary good, money, reduces the computational complexity to nH. A problem with decentralized information is demonstrated.

Suggested Citation

  • Alfred Lorn Norman, 1987. "A Theory of Monetary Exchange," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 54(3), pages 499-517.
    • Handle: RePEc:oup:restud:v:54:y:1987:i:3:p:499-517.
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    File URL: http://hdl.handle.net/10.2307/2297572
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    Cited by:

    1. Håkan J. Holm, 2004. "Rights and Decentralized Computation," Metroeconomica, Wiley Blackwell, vol. 55(2‐3), pages 290-317, May.
    2. Dubey, Pradeep & Sahi, Siddhartha & Shubik, Martin, 2018. "Money as minimal complexity," Games and Economic Behavior, Elsevier, vol. 108(C), pages 432-451.
    3. Gheorghe Săvoiu & Vasile Dinu & Laurenţiu Tăchiciu, 2012. "Romania Foreign Trade in Global Recession, Revealed by the Extended Method of Exchange Rate Indicators," The AMFITEATRU ECONOMIC journal, Academy of Economic Studies - Bucharest, Romania, vol. 14(31), pages 173-194, February.
    4. Kumaraswamy Velupillai, 2003. "Economics and the complexity vision: chimerical partners or elysian adventurers," Department of Economics Working Papers 0307, Department of Economics, University of Trento, Italia.
    5. Richard B. Goud Jr., 2002. "Inter-Firm Non-Monetary Transactions in Russia: A Literature Review," Development and Comp Systems 0207001, University Library of Munich, Germany.
    6. Holm, Hakan J., 1995. "Computational cost of verifying enforceable contracts," International Review of Law and Economics, Elsevier, vol. 15(2), pages 127-140, June.
    7. Dubey, Pradeep & Sahi, Siddhartha & Shubik, Martin, 2018. "Graphical exchange mechanisms," Games and Economic Behavior, Elsevier, vol. 108(C), pages 452-465.

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