Externalities and price dynamics

This paper analyzes dynamic movement of outputs and market clearing when mutually interdependent economies trade. The equilibrium evolution of stocks admit the possibility of monotonic or cyclical behavior, even in the long run. However, the prices eventually reach a steady state but may exhibit monotonic or oscillating behavior in the short run. Also I show that higher consumption per unit of stock is associated with lower productivity or negative externalities. A stronger preference for the foreign good increases or decreases consumption, depending whether the externality is negative or positive.