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Equilibrium and Media of Exchange in A Convex Trading Post Economy with Transaction Cost

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  • Starr, Ross M.

Abstract

General equilibrium is investigated with N commodities traded at N(N−1) 2 commodity-pairwise trading posts. Trade is a resource-using activity recovering transaction costs through the spread between bid (wholesale) and ask (retail) prices (quoted as commodity rates of exchange). Budget constraints are enforced at each trading post separately implying demand for a carrier of value between trading posts, commodity money. Existence of general equilibrium is established under conventional convexity and continuity conditions while structuring the price space to account for distinct bid and ask prices. Trade in media of exchange (commodity money) is the difference between gross and net inter-post trades.

Suggested Citation

  • Starr, Ross M., 2007. "Equilibrium and Media of Exchange in A Convex Trading Post Economy with Transaction Cost," University of California at San Diego, Economics Working Paper Series qt4tn3m0tx, Department of Economics, UC San Diego.
    • Handle: RePEc:cdl:ucsdec:qt4tn3m0tx
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    References listed on IDEAS

    as
    1. Ross M. Starr, 2003. "Why is there money? Endogenous derivation of `money' as the most liquid asset: a class of examples," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 21(2), pages 455-474, March.
    2. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-954, August.
    3. Shapley, Lloyd S & Shubik, Martin, 1977. "Trade Using One Commodity as a Means of Payment," Journal of Political Economy, University of Chicago Press, vol. 85(5), pages 937-968, October.
    4. Hahn, F H, 1971. "Equilibrium with Transaction Costs," Econometrica, Econometric Society, vol. 39(3), pages 417-439, May.
    5. Foley, Duncan K., 1970. "Economic equilibrium with costly marketing," Journal of Economic Theory, Elsevier, vol. 2(3), pages 276-291, September.
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