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Pricing the Planet's FutureThe Economics of Discounting in an Uncertain World$
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Christian Gollier

Print publication date: 2012

Print ISBN-13: 9780691148762

Published to Princeton Scholarship Online: October 2017

DOI: 10.23943/princeton/9780691148762.001.0001

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Three Ways to Determine the Discount Rate

Three Ways to Determine the Discount Rate

Chapter:
(p.17) 1 Three Ways to Determine the Discount Rate
Source:
Pricing the Planet's Future
Author(s):

Christian Gollier

Publisher:
Princeton University Press
DOI:10.23943/princeton/9780691148762.003.0001

This chapter presents the simple two-period model that is used in classical economics textbooks to examine the problem of consumption, saving, and investment in a competitive economy. This model is a reminder of the key role of the interest rate for the determination of economic growth. Its equilibrium level balances the demand and the supply of liquidity, which are themselves characterized by time preferences and investment opportunities. From a simple arbitrage argument, any new investment opportunity in the economy should be evaluated by using the interest rate as the rate at which the future benefits of the project should be discounted.

Keywords:   two-period model, competitive economy, interest rate, economic growth, liquidity, new investment opportunities

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