Chapter 2

# Chapter 2 - THE Closed BASIC GE MODEL AUTARKY SOLUTIONS In...

This preview shows pages 1–3. Sign up to view the full content.

THE Closed BASIC GE MODEL: AUTARKY SOLUTIONS In this closed basic model, there is Autarky or Self-Sufficiency (a self-sufficient country abstains from trade, i.e., the economy is a closed economy). The Autarky Solution : Production, consumption and relative prices are determined simultaneously (S*, T* and P* S /P T ) The Autarky Solution in the GE model : production, consumption and relative prices are determined simultaneously. The solution is achieved after the producers and consumers agree on the same relative price ( one price ). The producers’ relative price is called the relative price the producers are asking for . It’s the slope of the PPF. The consumers’ relative price is the relative price the consumers are willing to pay . It’s the slope of the community indifference curve Two ways to derive the solution: 1. Using the PPF and one of the CICs. 2. National Supply (NS) and National Demand (ND). 1. Solution of Closed Basic Model: The PPF and CIC Consumers: Maximize satisfaction Producers: Maximize total revenue and try to meet consumers’ demand. The solution is determined by the tangency between the CIC and the PPF. Slope of CIC = Slope of PPF (or one relative price P S /P T ) Relative price consumers willing to pay = Relative price producers asking for The slope of the CIC is the relative price P S /P T the consumers are willing to pay, while the slope of the PPF is the relative price P S /P T the producers are asking for . Solution for the Closed Basic Model: Equilibrium condition: slopes of CIC and PP are equal Relative price producers asking for is a result of Assumption 5 where the relative price equals the slope of the PPF at the production point, which is the opportunity cost.

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

View Full Document
Case 1 : The Autarky Solution: PPF with Constant Opportunity Cost Here, the PPF is a straight line since the opportunity cost is constant. Thus, the PPF determines the price line because by A.5 we have P S /P T = constant = T/ S (e.g., slope of price line = slope of PPF). Then the price line and the PPF coincide or the producers determine the relative price. The
This is the end of the preview. Sign up to access the rest of the document.

## This note was uploaded on 04/03/2012 for the course ECON 300 taught by Professor Gang during the Fall '06 term at Rutgers.

### Page1 / 6

Chapter 2 - THE Closed BASIC GE MODEL AUTARKY SOLUTIONS In...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online