Shifts In Relative Prices Research Articles

One world money, then and now

The case for monetary simplification and unification has been made since the middle of the nineteenth century. It rests on four principal arguments; reduced transaction costs; establishing credibility; preventing bad policy in other states; political integration via money. In this paper we argue that the case for monetary integration is becoming increasingly less persuasive. In making our case we posit a different concept of money to the one that underlay the nineteenth century discussions which we term “Newtonian” since it was based on the assumption of a single reference external to the state reflected in the definition of value in terms of precious metals. In the twentieth century, views of money have shifted to a more “Einsteinian” or relativistic conception. Measures of value that move relative to each other are helpful in terms of dealing with large shifts in relative prices that affect different countries very differently. In the current age of globalization, “Einsteinian” money is capable of accommodating shifts that were politically destructive in the “Newtonian” world.

A dynamic input–output model with explicit new and old technologies: an application to the UK

Progress is traditionally measured by the improvement of an economy's average characteristics from year to year. Some deeper insight might be gained by splitting the averages into explicit parameters for the new and old technologies at work within the same year, and recognising that innovative growth is driven just by the ‘potential difference’ between these two types of technology. Economic modelling in this light generates volatile development paths greatly resembling actual statistical time series, giving a holistic description of cycles, structural change, structural unemployment, relative price shifts and capacity utilisation issues. The paper expands the author's elaborations of the explicit-new-technology approach from prototype economies to that of the UK. Forecasts very close to reality are achieved including the 1992 cyclical decline. All this gives empirical support to the premise that the input–output method, if modified, could become a competitive tool for analysing ‘spontaneous’ market forces, as well as for direct planning. The need for separate statistical accounting of parameters for new technologies at macro- and industry-levels is substantiated.

Relative price shifts, economies of scale and poverty during economic transition1

AbstractEconomic transition is associated with significant shifts in relative prices between private and public goods. If, as a result, public goods claim a larger share of total expenditures, economies of scale in consumption increase. We show how relative price changes might alter the welfare of different‐sized households in the short run and over time. We illustrate, for a selection of transition economies, that conventional poverty profiles are quite sensitive to assumptions made about economies of scale in consumption. In particular, the common view that large households with many children are poor relative to small households (such as those comprising the elderly) is shown to be highly non‐robust.

High Inflation and Real Wages

Empirical data show that real wages fall sharply during periods of high inflation. This paper suggests a simple general equilibrium explanation, without relying on nominal rigidities. It presents an intertemporal two-sector model with a cash-in-advance constraint. In this setting, inflation reduces real wages through (1) a decline of the capital stock, and (2) a shift in relative prices. The two effects are additive and make the decline in real wages exceed the decline in per-capita GDP. This mechanism may contribute to rising poverty during periods of high inflation.

On the Evolution of Relative Prices and Its Nature at the Regional Level: The Case of Spain

This paper studies the relevance and nature of shifts in relative prices at the regional level in Spain. Deviations in relative prices tend to be small (at most half a point of inflation annually) but persistent. They are determined by features intrinsic to deep economic integration, in particular, wage mechanisms operating at the national level. This is in stark contrast to evidence at the international level. Therefore, while acknowledging that divergent price evolutions are possible in the European Monetary Union, their nature will be different from those observed among Spanish regions.

The Economic Evolution of Petroleum Property Rights in the United States

We examine Harold Demsetz's (1967) prediction that property rights would emerge and be refined once the benefits of doing so exceeded the costs. We follow the gradual development of property rights to subsurface oil and gas deposits in the United States through private and political negotiations to test this prediction. The pattern has been influenced by technological change, shifts in relative prices, information asymmetries, and political factors. All in all, the pattern of property rights development for oil and gas described follows the broad outlines sketched Demsetz. But the details of the bargaining process, the importance of information asymmetries and price volatility, and the key role of politics have resulted in property rights structures that would not have been predicted in a strict neo-classical sense. Our analysis provides insights regarding the industry practice of crafting unitization agreements that distinguish between multiple participating areas and/or time-phases of extraction. Completing these agreements often is plagued by high transactions costs, and the state has intervened to force unitization. But we argue that under certain circumstances this action may not improve welfare.

High Inflation and Real Wages

Empirical data show that real wages fall sharply during periods of high inflation. This paper suggests a simple general equilibrium explanation, without relying on nominal rigidities. It presents an intertemporal two-sector model with a cash-in-advance constraint. In this setting, inflation reduces real wages through (1) a decline of the capital stock, and (2) a shift in relative prices. The two effects are additive and make the decline in real wages exceed the decline in per-capita GDP. This mechanism may contribute to rising poverty during periods of high inflation.

Can China's Gradualist Reform Strategy be Applied in Eastern Europe?

This paper seeks to lay out the strategy of China's developmental approach to transition--how the strategy was developed and why it has worked so well for China. It then goes on to answer the arguments of Sachs and Woo (1994, 1995, 1996) that China's approach to transition has no relevance to the nations of Eastern Europe and the former Soviet Union (EEFSU). The paper begins with a review of China's agricultural reforms. The initial policy changes, as laid out by the Third Plenum in December 1978, were very timid, maintaining the commune and production team structure. But through a process of local experimentation and feedback to the center, the Household Responsibility System eventually became the national standard and free markets in everything but land were established. Neoclassical economists have always insisted that the reform process in the formerly socialist economies must begin with simultaneous stabilization, price and trade liberalization and currency convertibility. But China has moved very slowly in these areas and has done spectacularly well. Sachs and Woo's answer is that China is a special case because of the very small size of its state sector; according to them, the dominance of subsidized state sector jobs in the EEFSU economies means that large shifts in relative prices are needed in order to induce an adequate flow of resources into the new private sector. But this argument ignores the role of demand, both demand for the products of non-state sector and especially the derived demand for workers. This is what is likely to be the binding constraint on the speed with which transition can be carried out over the medium term. Moreover, the state sector in the inner core countries of Eastern Europe is much too inefficient to compete at world prices and much too big to simply be shut down. A big bang jump to international prices will result in a flood of workers out of the state sector before new jobs are ready for them. Rather China's strategy of a gradual change over to international prices is called for, in order to allow the state sector time to melt away.

Dynamic effects of trade liberalization and currency overvaluation under conditions of increasing returns

In this paper we examine the dynamic implications of a shift in relative prices between traded and non‐traded goods. In accordance with empirical evidence we allow for sluggish wage adjustment and increasing returns to scale in the traded goods sector. The presence of increasing returns to scale gives rise to multiple equilibria, and trade liberalization and the associated short‐run changes in relative prices may leave the economy outside a ‘corridor of stability’ and lead to a cumulative process of contraction of the capital stock.

Can China's gradualist reform strategy be applied in Eastern Europe?

This paper seeks to lay out the strategy of China's developmental approach to transition ‐ how the strategy was developed and why it has worked so well for China. It then goes on to answer the arguments of Sachs and Woo (1994, 1995, 1996) that China's approach to transition has no relevance to the nations of Eastern Europe and the former Soviet Union (EEFSU). The paper begins with a review of China's agricultural reforms. The initial policy changes, as laid out by the Third Plenum in December 1978, were very timid, maintaining the commune and production team structure. But through a process of local experimentation and feedback to the center, the Household Responsibility System eventually became the national standard and free markets in everything but land were established. Neoclassical economists have always insisted that the reform process in the formerly socialist economies must begin with simultaneous stabilization, price and trade liberalization and currency convertibility. But China has moved very slowly in these areas and has done spectacularly well. Sachs and Woo's answer is that China is a special case because of the very small size of its state sector; according to them, the dominance of subsidized state sector jobs in the EEFSU economies means that large shifts in relative prices are needed in order to induce an adequate flow of resources into the new private sector. But this argument ignores the role of demand, both demand for the products of state industry and the derived demand for industrial workers. The state sector in the inner‐core countries of Eastern Europe is much too inefficient to compete at world prices and much too big to simply be shut down. A ‘big bang’ jump to international prices will result in a flood of workers out of the state sector before new jobs are ready for them. Rather China's strategy of a gradual change over to international prices is called for, in order to allow the state sector time to melt away.

Quadratic Engel Curves and Consumer Demand

This paper presents a model of consumer demand that is consistent with the observed expenditure patterns of individual consumers in a long time series of expenditure surveys and is also able to provide a detailed welfare analysis of shifts in relative prices. A nonparametric analysis of consumer expenditure patterns suggests that Engel curves require quadratic terms in the logarithm of expenditure. While popular models of demand such as the Translog or the Almost Ideal Demand Systems do allow flexible price responses within a theoretically coherent structure, they have expenditure share Engel curves that are linear in the logarithm of total expenditure. We derive the complete class of integrable quadratic logarithmic expenditure share systems. A specification from this class is estimated on a large pooled data set of U.K. households. Models that fail to account for Engel curvature are found ro generate important distortions in the patterns of welfare losses associated with a tax increase.

Inflation dynamics in Kazakhstan1

AbstractIn January 1992, Kazakhstan initiated a reform programme to move towards market‐determined prices. The price liberalization process was characterized by large relative price shifts and an increase in the overall price level towards those observed in market economies. The paper shows how the piecemeal manner in which prices were liberalized resulted in strong relative price variability over a prolonged period of time, against a background of high inflation. Convergence towards international relative and absolute price levels has progressed but is not complete, with prices for energy and services in particular still below market economy levels.

Induced innovation and path dependence: A reassessment with respect to agricultural development and the environment

The study reviews two models of technical change—induced innovation and path-dependent models of technical change. The study argues that the two models are complementary rather than alternative explanations of the forces that influence the direction of technical change. Although path-dependent properties can give rise to surprising consistency and duration in the direction of technological change, historical development of a technology seldom proceeds indefinitely along an initially selected process array. As technical progress slows down, a shift in relative factor prices can induce an intensified search for technologies along a new direction that is more consistent with contemporary factor prices. This explains why technological inertia can be overcome to induce a path of technological development and infrastructure investments consistent with the rising value of environmental resources.

Exchange rate, fiscal and agricultural policies in Africa: Does adjustment hurt the poor?

Trade, exchange rate, fiscal, and agricultural sector policy reforms are the pillars of structural adjustment programs in Africa. Results indicate that trade and exchange rate reforms are associated with a large decline in economic rents and a shift in relative prices that favor the rural and urban poor. Fiscal reforms have not brought about draconian belt-tightening measures, although the incidence of public spending, particularly in the social sectors and in terms of public sector employment, remains far from progressive. Reduction of export crop taxation contributes to higher incomes for the poor, and domestic food crop liberalization has not led to increases in purchase prices of staple commodities for most low-income households.

Inflation Dynamics in Kazakstan

In January 1992, Kazakstan initiated a reform program to move toward market-determined prices. The price liberalization process was characterized by large relative price shifts and an increase in the overall price level toward those observed in market economies. The paper shows how the piecemeal manner in which prices were liberalized resulted in strong relative price variability over a prolonged period of time, against a background of high inflation. Convergence toward international relative and absolute price levels has progressed but is not complete, with prices for energy and services in particular still below market economy levels.

A general equilibrium analysis of rural-urban migration under uncertainty.

"This paper analyzes the implications of an exogenous shift in relative prices for an economy that suffers from urban unemployment, as well as uncertainty in the agricultural sector. Among other things, we show that with agricultural uncertainty, an exogenous shift in relative prices will lower agricultural profit. This result is in sharp contrast with the conventional case of risk-neutrality or certainty where agricultural profit is unaffected by changes in the terms of trade." The consequences for rural-urban migration in developing countries are implied.

Environmental Policy in the F.R.G.: its Economic Costs and the Sectorial Impact

This paper extends and applies input-output techniques to quantify the impact of environmental targets pursued within the Federal Republic of Germany. In particular, the simultaneous adaptations of consumers and producers to the structural changes and induced shifts in relative prices due to abatement efforts are investigated within a general equilibrium framework. Assuming an efficient environmental policy, i.e. internalizing the external costs, the following empirical results are obtained: current environmental targets will induce a comparatively minor loss of the gross domestic product; hence a welfare gain may result from such a policy (although the positive aspects itself have not been quantified). This positive result masks some problems at a more disaggregated level. In particular, some sectors may face significant reduction in economic activity. Since these sectors are similar to the ones already hurt by the hikes in energy prices and other structural changes, environmental considerations will accelerate the structural changes. This process may create and aggravate already existing economic and political tensions.

Monetary Versus Velocity Interpretations of the “Price Revolution”: A Comment

In recent article in this JOURNAL, Douglas Fisher defended monetary interpretation of revolution of sixteenth century.' He produced evidence that seemed to run counter to population- and velocity-based explanation I have propounded elsewhere.2 However, when closely scrutinized, Fisher's evidence does not support monetarist argument. Instead, it provides unanticipated evidence in favor of population- and velocity-based account. Fisher rehearsed usual debate about monetary versus population- and velocity-based arguments. He pointed out that price in Spain caused by bullion inflows could have raised prices and increased money demand elsewhere through balance-of-payment effects that did not depend on American bullion spreading through Europe. He also pointed out that population-based accounts sometimes err by emphasizing relative price shifts between agricultural and other prices rather than focusing on changes in overall price level. Finally, Fisher expressed skepticism regarding whether, given expansion of economic activity due to urbanization and population growth, velocity could have been sufficient to of sustaining long price rise. However, Fisher omitted several germane points from his discussion. First, he made no mention of research done by M. Morineau, J. Riley, and J. McCusker on period following price revolution.3 Morineau demonstrated that bullion exports to Europe were considerably greater in latter half of seventeenth century than in latter half of sixteenth century; however, in later period European prices stagnated or fell. Moreover, Riley and McCusker found that relationship between French mint output and French prices-which Fisher claimed to have demonstrated to exist during price revolution-failed to hold after 1650. Riley noted that in France after 1650, increases in money stock . . . do not explain price level movements; and Riley and McCusker emphasized that the money stock grew most rapidly when prices were stable, and least rapidly when prices were rising.' These findings suggest that relationship between money stock and prices in earlier period should be viewed with skepticism and care, as possibly spurious rather than causal. Second, Fisher dismissed Peter Lindert's evidence of large velocity shifts during price revolution5 and flatly claimed that a rise in velocity will not by itself do job if there is, simultaneously, general economic growth (p. 891). Yet this assertion omits mention of my demonstration-using network theory-that urbanization and occupational specialization accompanying population can cause velocity of circulation to increase as square of population, even though quantity of goods traded only linearly.6 In this model, population prices not simply by augmenting demand but by producing greater density of exchange

Intersectoral capital reallocation under price uncertainty

Consider a small open two-sector economy with costly capital mobility. The world price follows Brownian motion. The optimal reallocation policy is found using the theory of option pricing. The total value of each capital unit is its expected discounted marginal product in the current sector plus the option value of moving it to the other sector. A marginal unit is moved when its total value in the new sector exceeds that in the old sector, plus the adjustment cost. This yields ‘hysteresis’ — a zone of inaction and caution before reorienting capital in response to relative price shifts.

Regional Policy Simulations with an Interregional Input-Output Model of the Philippines

NGO T. W., JAZAYERI A. and RICHARDSON H. W. (1987) Regional policy simulations with an interregional input-output model of the Philippines, Reg. Studies 21, 121–130. A two-region (core-periphery) interregional input-output model of the Philippines is developed. Analysis of impact multipliers showed that the interregional as opposed to the intraregional contribution to national multipliers was also small and that the location of many industries in peripheral regions was efficient in the sense of generating larger multipliers. The model was used, via incorporating the effects of relative price shifts in the technical coefficient matrix and elasticity effects on final demand, to examine three types of policy instrument: infrastructure subsidies; labour subsidies; and policies to change the internal terms of trade. The output stimulus from a targetted labour subsidy was generally greater than that from an infrastructure subsidy, but a very large subsidy would be needed to match the impact of a 20% increase in...