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minehart_ge - General Equilibrium: Introduction Interaction...

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General Equilibrium: Introduction •I n t e r a c t i o n o f a l l m a r k e t s i n e c o n o m y . A l l p r i c e s are variable, and in equilibrium, all markets must clear simultaneously •C o n t r a s t s t o p a r t i a l e q u i l i b r i u m a n a l y s i s w h e r e a n industry or market is evaluated separately from others
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•T o o l f o r e v a l u a t i n g p o l i c i e s t h a t a f f e c t m a n y markets at the same time – public economics, international trade •E x p l a i n s h o w p r i c e s a r i s e f r o m t h e f u n d a m e n t a l s of the economy x p r e s s e s A d a m S m i t h s i n v i s i b l e h a n d . P r i c e system coordinates decentralized activities to arrive at an efficient outcome.
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Basic Issues for GE Models I. Existence of equilibrium Is the model coherent? –I s i t p o s s i b l e f o r a l l m a r k e t s t o c l e a r a t s a m e t i m e ? –W h a t c o n d i t i o n s g u a r a n t e e e x i s t e n c e ? A r e t h e y reasonable? II. Uniqueness s t h e e q u i l i b r i u m i n e v i t a b l e ? –M a y t h e e c o n o m y e n d u p a t v a r i o u s o u t c o m e s ? Can they be compared? h a t c o n d i t i o n s g u a r a n t e e u n i q u e n e s s ? A r e t h e y reasonable?
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III. Optimality –A r e o u t c o m e s e f f i c i e n t ? –W e l f a r e T h e o r e m s IV. Stability r e e q u i l i b r i a r o b u s t o r d o t h e y c h a n g e dramatically when there are small perturbations of parameters?
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Applications •I n t e r n a t i o n a l T r a d e w h o b e n e f i t s w h e n a n economy opens to trade? •S o c i a l C h o i c e h o w m i g h t a s o c i e t y collectively choose to distribute its resources?
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GE complements Game Theory –W eakne s s o f GE : p r ice - tak ing a s sump t ion , no s t ra teg ic behavior. – Strength of GE: elegant analysis of interactions between markets. –Gam e Theo ry : u se fu l fo r s tudy ind iv idua l m a rke t s . Less useful for general equilibrium questions.
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1 GE Theory – Preview Main themes in GE will be illustrated with a simple two-consumer, two good Edgeworth box economy. •W a l r a s i a ne q u i l i b r i um d e f i n e d •E x i s t e n c e q u e s t i o n s •U n i q u e n e s s q u e s t i o n s f f i c i e n c y Chapter 15, MWG, Sections A,B Pure Exchange Economy •N o p r o d u c t i o n , c o n s e r s e x c h a n g e e n d owm e n t s •2 c o n s e r s , i =1,2 g o o d s , l =1,2 x i =( x 1i ,x 2i ), consumption of i Ȧ i = ( Ȧ 1i , Ȧ 2i ), endowment of I ± i preferences are complete, transitive, and monotone
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2 An allocation is x = ( x 1 , x 2 ) = (( x 11 ,x 21 ), ( x 12 22 )) A feasible allocation satisfies 2 22 21 22 21 1 12 11 12 11 ϖ ω = + + = + + x x x x 1 consumer of endowment ) , ( 1 good of endowment 21 11 1 12 11 1 = = = + = Edgeworth Box G o d 2 O 1 Ȧ O 2 Good 1 Ȧ 21 Ȧ 12 Ȧ 22 Ȧ 11
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3 Preferences – Indifference curves G o d 2 O 1 O 2 Good 1 Consumer Optimization A consumer maximizes utility over a budget set given by his wealth.
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minehart_ge - General Equilibrium: Introduction Interaction...

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