Munich Personal RePEc Archive

The Exchange Function and A Dynamic Exchange Model

Li, Wu (2015): The Exchange Function and A Dynamic Exchange Model.

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Abstract

In the neoclassical economics the tatonnement process is utilized to explain the price change. However, the tatonnement process assumes that there is no trading before the prices reach the equilibrium prices, which is extremely unrealistic since in the markets of the real world the exchange processes usually occur at disequilibrium prices. In this sense, the tatonnement process fails to describe and explain the price fluctuation and the disequilibrium exchange process in the real world. In this paper we introduce an exchange function to describe the exchange process under fixed prices. Based on the exchange function a discrete-time dynamic exchange model is developed. In the model a disequilibrium exchange process occurs in each period, and the prices vary on the basis of the prices and the exchange outcome in the preceding period.

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