A Three-Sector – Two-Country World

Abstract

Chapters 4, 5, and 6 develop models of a small open economy facing exogenous and constant traded good prices. Implicit in these models is the assumption that the rest of the world is in a steady-state equilibrium. Moreover, these models restrict ownership of capital stock to domestic residents, and preclude them from holding other country assets. Consequently, own saving is the sole source of domestic investment and the value of a country’s exports equal the value of its imports. We now relax these two assumptions and extend the basic model of Chapter 4 to a two-country world.