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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

Abstract

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

Suggested Citation

  • Starr, Ross M, 2005. "Equilibrium and Media of Exchange in a Convex Trading Post Economy with transaction Costs," University of California at San Diego, Economics Working Paper Series qt7q79h1vf, Department of Economics, UC San Diego.
    • Handle: RePEc:cdl:ucsdec:qt7q79h1vf
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    References listed on IDEAS

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    1. Ross M. Starr, 2003. "Why is there money? Endogenous derivation of `money' as the most liquid asset: a class of examples," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 21(2), pages 455-474, March.
    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 927-954, August.
    3. Hahn, F H, 1971. "Equilibrium with Transaction Costs," Econometrica, Econometric Society, vol. 39(3), pages 417-439, May.
    4. Foley, Duncan K., 1970. "Economic equilibrium with costly marketing," Journal of Economic Theory, Elsevier, vol. 2(3), pages 276-291, September.
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