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Equilibrium and Media of Exchange in a Convex Trading Post Economy with Transaction Costs

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  • Starr, Ross M.
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    Abstract

    General equilibrium is investigated with N commodities traded at N(N-1)/2 commodity-pairwise trading posts. Trade is a resource-using activity undertaken by firms recovering transaction costs through the spread between bid (wholesale) and ask (retail) prices (quoted as commodity rates of exchange). Budget constraints are enforced at each trading post separately so that there is demand for a carrier of value between trading posts, commidty money. Existence of generaly equilibrium is established under conventional convexity and continuity conditions and technical assumptions assuring boundedness of price ratios. Trade in media of exchange (commodity money) is the difference between household gross and net trades.

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    File URL: http://www.escholarship.org/uc/item/0ct6f4nc.pdf;origin=repeccitec
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    Bibliographic Info

    Paper provided by Department of Economics, UC San Diego in its series University of California at San Diego, Economics Working Paper Series with number qt0ct6f4nc.

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    Date of creation: 01 Jun 2006
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    Handle: RePEc:cdl:ucsdec:qt0ct6f4nc

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    Related research

    Keywords: transaction costs; media of exchange; Arrow-Debreu general equilibrium; bid price; ask price;

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    1. Foley, Duncan K., 1970. "Economic equilibrium with costly marketing," Journal of Economic Theory, Elsevier, vol. 2(3), pages 276-291, September.
    2. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-54, August.
    3. Shapley, Lloyd S & Shubik, Martin, 1977. "Trade Using One Commodity as a Means of Payment," Journal of Political Economy, University of Chicago Press, vol. 85(5), pages 937-68, October.
    4. Hahn, F H, 1971. "Equilibrium with Transaction Costs," Econometrica, Econometric Society, vol. 39(3), pages 417-39, May.
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