This paper presents the concept of numerical CGE modeling with the help of a 2-country general equilibrium model. In the framework of this simple dynamic monetary model the effects of a (unilateral) monetary and fiscal expansion are simulated. The exchange rate of the home vis-à-vis the foreign currency depreciates in response to both types of shocks. The monetary expansion leads to an increase in home relative to foreign private consumption and to a sharp increase in relative home output in the short run, while in the long run output increases in the foreign country and decreases in the home country. The unilateral fiscal expansion, on the other hand, results in a fall of private consumption in the home relative to the foreign country, and in an increase in relative home output in the short as well as in the long run. The world real interest rate falls quite substantially in response to both shocks. (author's abstract) / Series: Department of Economics Working Paper Series

In this paper we develop a spatial Cournot trade model with two unequally sized countries, using the geographical interpretation of the Hotelling line. We analyze the trade and welfare effects of international trade between these two countries. The welfare analysis indicates that in this framework the large country benefits from free trade and the small country may be hurt by opening to trade. This finding is contrary to the results of Shachmurove and Spiegel (1995) as well as Tharakan and Thisse (2002), who use related models to analyze size effects in international trade, where the small country usually gains from trade and the large country may lose.