Intertemporal Trade

7 Key excerpts on "Intertemporal Trade"

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  eBook - ePub

  Financial Economics

  • Chris Jones(Author)
  • 2008(Publication Date)
  • Routledge

    (Publisher)

  2

  The role of trade is examined in Section 2.2 by introducing it in stages. Atemporal trade is introduced to the autarky economy where consumers exchange goods in each time period but not over time. This first step conveniently allows us to summarize intertemporal consumption choices using dollar values of expenditure in each period. It is the basis for the standard Fisher (1930) analysis of intertemporal consumption choices over current and future expenditure. Since consumers equate the marginal utility from spending (real) income on each good in their bundle, the composition of the consumption bundle can be suppressed in the analysis. Fiat money (currency) is then included to identify its role as a medium of exchange, and we do this by initially ruling out currency as a store of value, where the demand for currency is determined by its ability to reduce trading costs in each time period. The final extension allows consumers to also trade across time periods in a market economy, where some save while others borrow due to differences in their preferences, income flows and /or the rate of interest (which equates aggregate borrowing and saving in a competitive capital market). These intertemporal transfers can be made without affecting aggregate consumption. It only requires consumers to have different marginal valuations for future relative to current consumption. And there is even greater scope to trade intertemporally when aggregate consumption can be transferred into the future through storage and other forms of investment.

  Financial securities play a number of important roles in market economies, one of which is to reduce the costs of trading private property rights over resources. Most finance models ignore these costs because they are relatively small, but that diminishes their importance, particularly when there is uncertainty and asymmetric information between traders where property rights are more costly to trade. In a certainty setting with complete information, no transactions costs, and perfectly divisible capital goods, there is no role for financial securities. In reality, however, goods are not perfectly divisible and they are costly to move about, and financial securities, and in particular fiat money, can dramatically lower these costs by reducing the number of physical exchanges of goods and services. Without financial assets consumers would exchange goods numerous times before finally converting them into their preferred consumption bundle. Since these assets provide holders with claims to underlying real resources, they reduce the number of times goods are transferred between consumers. When financial securities trade in a market economy we refer to it as an asset economy

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  Global Finance and the Macroeconomy

  • A. Makin(Author)
  • 2016(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  4 Intertemporal Trade, Capital Mobility and Interest Rates This chapter analyses the relationship between international ®nance and macroeconomic activity by combining aspects of production, trade and ®nance theory. It adapts and extends the precepts of Irving Fisher's (1930) intertemporal theory of interest rates by ®rst high- lighting the linkages between consumption, saving, investment, international ®nancial ¯ows, interest rates, national income, foreign debt and national wealth. It then shows how international trade in saving confers macroeconomic welfare gains before reconciling intertemporal analysis with a loanable funds approach that can be used as a basis for interpreting international capital mobility. 4.1 The intertemporal approach In a two-sector economy, comprised of households and ®rms, it can be assumed that aggregate output and expenditure are determined separately as suggested by absorption related approaches to external adjustment. Firms invest and combine labour, land, existing capital with given technology to produce maximum output over two periods of time (the present and the whole of the future), whereas households have preferences for present consumption (C 1 ) versus future consump- tion (C 2 ) and supply labour inelastically. Once again, the analysis abstracts from capital stock depreciation. Central to the intertemporal approach is the notion of an investment opportunities function (f) which transforms forgone present consumption (saving) into future output (Y 2 ) through additional capital accumulation (investment I 1 ). The transformation 61 62 Global Finance and the Macroeconomy curve is de®ned as F(Y 1 , Y 2 ) 0 and the intertemporal production function is of the form Y 2 Y 1 (K, L) f(I 1 ). To ®x ideas about the intertemporal approach, ®rst consider some basic optimising condi- tions, initially in the closed economy context. These conditions form the basis for subsequent diagrammatic analysis for the open economy.

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  eBook - ePub

  Handbook of International Economics

  • G.M. Grossman, Kenneth Rogoff(Authors)
  • 1997(Publication Date)
  • North Holland

    (Publisher)

  Instead, the intertemporal approach emphasized the response of forward-looking individuals to the changes in lifetime consumption possibilities that terms-of-trade movements cause. The simplest case is of a specialized economy with an exogenous endowment Y of its export good, but which also consumes imports. As in the model with nontradeables, we again assume an isoelastic period utility function defined over a CES index C ; here it depends on the individual's consumptions C M of imports and C x of exports: C = [ α 1 / ρ C M (ρ − 1) / ρ + (1 − α) 1 / ρ C X (ρ − 1) / ρ ] ρ / (ρ − 1) Let p now denote the price of exports in terms of imports, which is determined exogenously in the world market. The consumption-based price level in terms of imports is again denoted by P and given by formula (3.18). The natural benchmark case, assumed by Svensson and Razin (1983), supposes that Intertemporal Trade is done through bonds indexed to the consumption index, C. In this case r is the own rate of interest on the consumption index, and the budget constraint corresponding to (3.3) in the present setup (abstracting from investment and government) is ∑ s = t ∞ R t, s C s = (1 + r t) A t + ∑ s = t ∞ R t, s (p s Y s P s) The Euler equation for the consumption index is again (3.7), implying the consumption function corresponding to (3.8), which has I = G = 0 and pY / P in place of Y. To focus on the terms of trade, it is helpful to assume that r = (1 − β)/ β and Y are constant, in which case the consumption function reduces to: C t = r A t + r 1 + r ∑ s = t ∞ (1 1 + r) s − t (p s Y P s) A fall in the terms of trade lowers p (the relative price of exports in terms of imports) relative to P (the overall CPI in terms of imports). Thus, fluctuations in the terms of trade affect the consumption index and the current account (which here is measured in consumption-index units) exactly like fluctuations in GDP at constant terms of trade

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  Capital, Profits, and Prices

  An Essay in the Philosophy of Economics

  • Daniel M. Hausman(Author)
  • 2019(Publication Date)
  • Columbia University Press

    (Publisher)

  Just as the theory of resource allocation has as its dual a theory of competitive pricing, so the theory of capital has as its dual a theory of intertemporal pricing involving rentals, interest INTERTEMPORAL THEORY 85 rates, present values, and the like. In both cases, a complete price theory is also a theory of distribution among factors of production, if not among persons. (1963: 14) According to Samuelson and Solow the Cambridge critics have been attacking parables and simplifications; their comments do not touch the rigorous theory. I shall now examine this highbrow answer— the theory of intertemporal pricing. One must thus look beyond the simple parables to the more general models developed by contemporary theorists. Walras' own models, or even their refinement in Lindahl's work (1939, part III) will not be discussed, because both face serious criticisms (Eatwell 1975c, Collard 1973, and Jaffe 1942) and have been superseded by intertemporal gen-eral equilibrium models as developed by Arrow, Debreu, and Malin-vaud. I know of no acceptable treatment of the rate of interest or profit which employs a model of a stationary general equilibrium. 1. Intertemporal General Equilibrium In this chapter I shall largely follow Malinvaud's lucid exposition (1972, ch. 10).' Equilibrium theorists distinguish commodities both by their nature and by the time period in which they are available. Thereby they reinterpret the atemporal production equilibrium (ch. 2, §2) as an intertemporal equilibrium. Goods are commodities of the same na-ture. Malinvaud is concerned with the organization of the economy (of production, distribution, and consumption) during a time period from t = 1 to t = T. The date t = 1 is now. All the individuals involved make all their decisions now for the entire period up to T. Each agent thus decides on a program of activities during each period.

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  The Wiley Blackwell Handbook of Judgment and Decision Making

  • Gideon Keren, George Wu, Gideon Keren, George Wu(Authors)
  • 2015(Publication Date)
  • Wiley-Blackwell

    (Publisher)

  5 The Psychology of Intertemporal Preferences Oleg Urminsky

  University of Chicago, Booth School of Business, USA

  Gal Zauberman

  Yale University, Yale School of Management, USA

  Introduction

  Intertemporal decisions involve relative preferences and trade-offs for costs and benefits that occur over time. These decisions are ubiquitous and have been extensively studied across multiple academic disciplines, including economics, psychology, business, and public policy. Common examples of such decisions include whether to consume today (i.e., borrow more and/or save less) but have less in your retirement fund; to purchase a cheaper refrigerator or air-conditioning unit but forgo the ongoing energy savings; to hire an experienced employee who can start immediately instead of the brilliant but inexperienced recent graduate who needs more extensive training; or to eat that fatty chocolate cream dessert rather than the blueberry sorbet, increasing your current enjoyment while increasing the risk for your long-term health.

  Research on this question has occupied the pages of many journals and produced multiple highly influential papers (Ainslie, 1975; Fisher, 1930 Frederick, Loewenstein, & O’Donoghue, 2002; Kirby, Petry, & Bickel, Laibson, 1997; Thaler, 1981). The seminal paper on time discounting by Ainslie (1975), which drew a link between findings from the animal behavior literature and a detailed theory of shifting time preferences, self-control, and precommitment, spurred a large and evolving research literature.

  Numerous previous chapters have surveyed the field. Loewenstein (1992) provides a detailed account of the development of thinking about intertemporal choice within economics. Frederick, et al. (2002) present a detailed review and discussion of the development of the literature on time discounting in both psychology and economics. Baron (2007) offers a general review of decisions involving time, while Read (2004) and Killeen (2009) review alternative mathematical forms of discount functions. Recently, there have been reviews focusing on the neurological underpinning of intertemporal decisions (e.g., Kable, 2013).

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  Explaining Money & Banking

  • Bryon B. Carson, Robert E. Wright(Authors)
  • 2023(Publication Date)
  • Business Expert Press

    (Publisher)

  Here is another way to consider time preference. Imagine your favorite social media influencer tells you the world is ending in 24 hours and you believe the message. What would you do? What would other people do? We should expect that with so little time, people would prefer consumption today rather than tomorrow. Indeed, whatever people might consume or whatever plans they might make after tomorrow would become much less valuable. This is a situation where your time preference has become very high and you prefer immediate rather than delayed satisfaction.

  Spot Transactions Are Nice, But Intertemporal Transactions Are Nicer

  To develop our intuition about time preference and interest, first think about spot transactions. Many of the day-to-day transactions we make, for example, like paying for groceries on the spot, are spot or immediate exchanges. Spot transactions reduce the chance for fraud as both parties have a fairly good idea of what is being exchanged. Also, the goods and money are exchanged simultaneously. The downside of spot transactions is that goods received must be consumed soon thereafter. That is, you wouldn’t buy on the spot market today a box of cereal to eat in one year; that would be some stale cereal. But you might contract today to buy that cereal in a year in what is called the forward market.

  Many people—for many centuries—have realized they might want to acquire goods today and pay later. Or they might provide goods today and accept payment later. Both are examples of what is termed the credit market.

  Credit markets have nothing to do with being lazy, a cheat, or poor. Or a greedy lender. Intertemporal exchanges are common, valuable components of economic activity, and make both parties to an exchange better off. Think about cases where you have paid for a good for which the benefits of that good accrue later, for example, the roofing of a house might take a couple days to install, but it provides shelter for years, student debtors receive education over the short term and pay the loan over a longer period, and homeowners buy a house and pay a mortgage. These are intertemporal exchanges.

  These kinds of exchanges make for distinct problems because time is now a factor; time raises the potential for a different kind of opportunity cost as well as risk. The opportunity cost of lending, for example, refers to the forsaken value of opportunities that could have been pursued over the period of the loan. Similarly, the risk of appropriation becomes more important as time separates the point at which a person receives a good and the point at which a person pays (or is paid).

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  The Economics of Financial Markets

  • Roy E. Bailey(Author)
  • 2005(Publication Date)
  • Cambridge University Press

    (Publisher)

  Also, sources of income other than the return on assets are ignored in this section. Finally, it is assumed that goods at each date can be aggregated into a single ‘consumption’ good each unit of which has a price equal to one unit of account (so that changes in the general price level are neglected). Each of these assumptions can be relaxed without sacrificing the fundamental insights of the analysis. In elementary microeconomics the intertemporal consumption decision is modelled by assuming that the individual chooses consumption C t in the present period and consumption C t + 1 one period into the future. The individual is assumed to be ‘endowed’ with a given quantity of goods in each of the two periods, and, inasmuch as C t and C t + 1 differ from the endowments in t and t + 1, the individual saves or borrows between the present, t , and the future, t + 1. Here it is assumed that the endowment takes the form of wealth, W t , available at the present, date t . (Presumably, W t was accumulated in the past – i.e. dates prior to t .) The difference between wealth and current consumption, W t − C t , represents saving (if positive) or borrowing (if negative). 1 It is assumed provisionally that wealth is transferred between t and t + 1 at a given, certain interest rate, r t + 1 . Hence, wealth at the start of the next period, 1 Commonly, saving is defined as the excess of current income over current consumption. Here flows of income other than returns on assets are assumed to be zero, so that ‘saving’ is used in an unconventional way to refer to wealth net of current consumption. 252 The economics of financial markets date t + 1, equals W t + 1 = 1 + r t + 1 W t − C t . Given that all wealth is consumed at t + 1, the individual’s budget constraint is simply C t + 1 = 1 + r t + 1 W t − C t (11.2) In this framework each ‘date’, t , denotes the start of the time period, and consump-tion in period t takes place between date t and date t + 1.

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