Two-Period Solow

Two-Period Solow - International Finance Study of trade...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
1 The Two-Period Model Lecture 1 International Finance • Study of trade over time. – I give you a slip of paper today. – You give me goods today. – I give you goods in exchange for slip of paper tomorrow. • Trade over time is no different from trade in apples and oranges today. – All of our theories of comparative advantage etcetera, remain intact. – Need new terminology to capture ideas. • The slip of paper is a financial contract. The Financial Contract and Its Price • The contract is an agreement between two parties. The contract specifies the amount of one good I must give up today in order to receive a certain (different) good tomorrow. – Think apples today for oranges tomorrow. • How much should I pay for the contract? • There are two prices: – The relative price of the two goods. How many apples would I trade for one orange if they were both in the market at the same time. – The relative price between the two periods. How much do I have to pay to get extra consumption tomorrow in terms of consumption today. The Relative Price of the Two Goods • Throughout our economics training we are accustomed to thinking of different prices for different goods. • What determines the relative price of apples and oranges? – How much do we like apples versus oranges? If we like apples a lot relative to oranges, they will tend to be more expensive. – Are apples more readily available than oranges? If the supply of apples is high relative to oranges, they will tend to be cheaper. • So, supply and demand determine the relative price of apples and oranges – fascinating. The Relative Price Between Two Periods • The principal is the same: supply and demand determine the relative price of consumption today versus consumption tomorrow. • How eager are we to consume? – If we are very impatient (we want to eat now!), consumption today will tend to be more expensive. • Are times good or bad today relative to the future? – If there is lots of stuff to consume today (relative to tomorrow), today’s consumption will tend to be cheaper. • So, there will be no difference in thinking about trade today versus trade tomorrow, except in terminology. To Be More Specific, We Need a Model • The model is simply a representation of reality – We cannot expect too much of it. – It will, however, give us a framework with which we may
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 12/06/2010 for the course ECON 3020 taught by Professor Williamson during the Spring '10 term at FSU.

Page1 / 5

Two-Period Solow - International Finance Study of trade...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online