Some Strange Marriages between the Income-Expenditure Lag and Variable Prices: A Reply

Abstract

Mr. Spraos's recent is composed of two sections. The first shows that some logical difficulties arise when one attempts to derive satisfactory demand functions involving real income from expenditure equations used in some international trade models by Mr. Lloyd Wright, Professor Stolper, and by myself in an article published in 19522. On this point I quite agree with Mr. Spraos. I had made the same point myself, though admittedly for different reasons, about four years ago.3 However, the defects noted by myself and Mr. Spraos do not, I think, affect the main point of my model, which was simply to show the type of modifications that have to be introduced into the stability conditions for foreign trade multipliers when prices as well as incomes are allowed to change. But it is not worth while dwelling on this topic, because since 1952 it has been the subject of several very superior publications which have made my old model quite obsolete.4 Much more important, in my opinion, is the second section of Mr. Spraos's article, which is concerned with the empirical validity of a certain assumption concerning consumers' behaviour. This section of his article consists entirely of criticism of my assumption that expenditure on a given product in any period is a function of income in the preceding period and prices in the preceding period. Mr. Spraos says, Surely this is very strange, and goes on to assert that it is a well established partial postulate that given constant money income, the demand for any commodity reacts to a change in its price without a lag . Mr. Spraos's only evidence in support of this postulate is the following: When I go to a second-hand bookshop I do not ask what prices were charged yesterday for the various books I fancy. This is, as far as I am concerned, irrelevant history; what matters in weighing the