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New Trade Theory Takes Over Monetary Theory

Listed author(s):
  • M Gani

    (Economic Science Institute, Dhaka, Bangladesh.)

Prevailing trade theory is a neglected stepchild of economics. Micro rejects the sole reason for trade’s occurrence. It declares zero profit in equilibrium. Monetary theory and macroeconomics dismiss concerns of trade financing. They assert that money has nothing to do with traded output, but everything to do with storing value. But now a new trade theory takes over monetary theory, by reducing money into a mere tool of trade, as just a means of payment. It takes over theory of exchange, abolishing any distinction between micro and macro. Finally, all of economics becomes a study of exchange, what Whately wished in 1832. This magical empowerment of trade theory occurs as we add indirect trade formally. We put it in the familiar input-output table. We consider demand and supply at four levels: for each good, for each transaction, for each household/nation, and for each economy. At each level, something different happens in equilibrium. We employ intermediaries to settle prices through arbitrage, and payments through seigniorage (by creating and issuing money). Suddenly economics studies economy rather than human behavior. The market economy is an institution of exchange, which is a matrix of real output. All economics now belongs to trade.

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Paper provided by EconWPA in its series International Trade with number 0405005.

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Length: 34 pages
Date of creation: 18 May 2004
Handle: RePEc:wpa:wuwpit:0405005
Note: Type of Document - pdf; pages: 34. Whately's 1832 dream comes true as economics becomes science of exchange. Misesian message is put in Leontief's table. Monetary theory is changed at its root.
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  1. Leamer, Edward E, 1980. "The Leontief Paradox, Reconsidered," Journal of Political Economy, University of Chicago Press, vol. 88(3), pages 495-503, June.
  2. Debreu, Gerard, 1991. "The Mathematization of Economic Theory," American Economic Review, American Economic Association, vol. 81(1), pages 1-7, March.
  3. Ostroy, Joseph M. & Starr, Ross M., 1990. "The transactions role of money," Handbook of Monetary Economics,in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 1, chapter 1, pages 3-62 Elsevier.
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