Nov 012012
 

Small Open Economy (SOE): Small because consumers and firms are price takers and their action doesn’t affect world prices. Open because the economy trade with the rest of the world.
- Suppose two goods: a and b
- Terms of trade (TOTab ) or real exchange rate: the price of good a in terms of good b
- We will find conditions under which the Small Open Economy imports good a and exports good b

The slope of the Production Possibilities Frontier (PPF) is minus the marginal rate of transformation (MRTa,b), and the PPF is concave (see figure below).

Production Possibilities Frontier for the Small Open Economy

Production Possibilities Frontier for the Small Open Economy

The indifference curve of the representative consumer in the small open economy are downward sloping and convex (see figure below).

Indifference Curves of the Representative Consumer in the Small Open Economy

Indifference Curves of the Representative Consumer in the Small Open Economy

Source:

International Trade in Goods and Assets – “Macroeconomics” by Stephen D. Williamson

Nov 012012
 

Small Open Economy with no trade

If there is no trade in the small open economy, equilibrium is determined by the tangency between the PPF and indifference curve for the representative consumer. In equilibrium, the slope of the PFF is equal to minus the price of good a relative to good b (see figure bellow).

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Oct 252012
 

GENERAL INFORMATION

- Two Big Shifts in Aggregate Demand: The Great Depression and World War II. From 1929 to 1933 (The Great Depression), GDP fell by 27 percent.  From 1939 to 1944 (World War II), the economy’s production of goods and services almost doubled

- The Great Depression was a severe worldwide economic depression in the decade preceding World War II

- it started in 1930 and lasted until the late 1930s or middle 1940s. This period consists of a decline in economic activity (1929–33) followed by a recovery (1934–39). It was the longest, most widespread, and deepest depression of the 20th century.

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Oct 222012
 

Below are three microeconomics problems (or it could be insurance and investment problems as well) related to absolute risk aversion taken from the book The Structure of Economics: A Mathematical Analysis  3rd ed. by Eugene Silberberg and Wing Suen. These problems are include in the chapter Behavior Under Uncertainty. Absolute risk aversion has implications for the willingness of individuals to accept risk. The higher the coeffficient of absolute risk aversion, the higher the risk premium the individual is willing to pay. Relative risk aversion is absolute risk aversion times W, while W indicates initial Wealth. The higher the coeffficient of relative risk aversion, the higher the relative risk premium.

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Oct 222012
 

Below are two microeconomics problems (or it could be insurance and investment problems as well) related to relative risk aversion taken from the book The Structure of Economics: A Mathematical Analysis  3rd ed. by Eugene Silberberg and Wing Suen. These problems are include in the chapter Behavior Under Uncertainty. Absolute risk aversion has implications for the willingness of individuals to accept risk. The higher the coeffficient of absolute risk aversion, the higher the risk premium the individual is willing to pay. Relative risk aversion is absolute risk aversion times W, while W indicates initial Wealth. The higher the coeffficient of relative risk aversion, the higher the relative risk premium.

Continue reading »