ABSTRACT
The purpose of this chapter is to describe the workings of the economic sphere of a small open political economy treating the policies of the government as given. This chapter is set out in three steps. First we specify a simple structure of the economic sphere of the political economy in neo-classical terms in which government policies, factor endowment, production technologies, and tastes are treated as exogenous. This structure defines a unique equilibrium of the economic sphere that is characterized by a set of necessary and sufficient conditions. In the second step, these conditions are linearized in terms of percentage changes of the model variables around the equilibrium point, and solved to obtain comparative static responses of the endogenous variables to exogenous shocks. Finally, the properties of the shares and elasticity parameters involved in determining the comparative static responses are employed to deduce the general properties of the equilibrium solution functions that hold at all equilibrium points of the model.
