DEMAND, EQUILIBRIUM AND TRADE This book presents thirteen essays by distinguished economists written to honour the work of Professor lvor F. Pearce. The chapters cover all aspects of economics, reflecting the wide-ranging contribution made by Ivor Pearce to the discipline of economics, but his major contributions are to demand theory, general-equilibrium theory, trade theory and capital theory. The book contains a number of important new works. W. M. Gorman re-examines the Le Chatelier principle from a general-equilibrium perspective, and shows that one can derive conclusions contrary to those of the principle. P. Simmons generalises a number of measures of comple mentarity, including that proposed by Pearce. lvor Pearce has explained the restrictive assumptions one needs to derive rigorously the familiar propositions of trade theory, but J. Peter Neary shows that, by aggrega tion, one can overcome some of these restrictions provided one is willing to ask a different set of questions. Christopher Bliss uses Keynes's insight ful interpretation of the famous Ramsey Rule in optimal growth to derive results in a wide range of growth models with considerable economy and elegance. Murray C. Kemp and his colleagues analyse the problems that might confront a market economy in managing the transition from an exhaustible to a renewable resource. The Pearce and Gabor analysis of money capital is developed by Donald W. Katzner in a general-equilibrium model and A. G. Schweinberger in a general-equilibrium model of inter national trade. Andre Gabor surveys recent developments in transfer pricing, while L. R. Klein and his colleagues use the project LINK models to test the purchasing power parity hypothesis. Some problems in using macroeconomic data and models are explored in chapters by Sir Richard Stone and by Alan Budd and Sean Holly. Finally, Victoria Chick pursues some ideas of Ivor Pearce on the inflationary consequence of expansionary fiscal policy and relates her analysis to more recent work of Pearce on institutional arrangements to secure sound money. IVOR F. PEARCE ©Carmen Moll1984 Exclusive portraiture by Carmen Moll, ABIPP, ARPS, 22 The Bargate, Southampton, SOl ODJ, (0703) 2111D-21660 DEMAND, EQUILIBRIUM AND TRADE Essays in Honour of I vor F. Pearce Edited by A. Ingham and A. M. Ulph M MACMILLAN ©A. Ingham and A.M. Ulph 1984 Softcover reprint of the hardcover 1st edition 1984 978-0-333-33184-2 All rights reserved. No part of this publication may be reproduced or transmitted, in any form or by any means, without permission First published 1984 by THE MACMILLAN PRESS LTD London and Basingstoke Companies and representatives throughout the world British Library Cataloguing in Publication Data Demand, equilibrium and trade. 1. Equilibrium (Economics) - Addresses, essays, lectures I. Ingham, A. II. Ulph, A. M. Ill. Pearce, lvor F. 330.15'43 HB145 ISBN 978-1-349-06360-4 ISBN 978-1-349-06358-1 (eBook) DOI 10.1007/978-1-349-06358-1 Contents Preface vii The Contributors viii Bibliography of lvor F. Pearce ix Biographical Details of Ivor F. Pearce xii Ivor Pearce as a Colleague D. C. Rowan xiii Introduction A. Ingham and A. M. Ulph xvii Le Chatelier and General Equilibrium W.M Gorman 19 2 A Complement to Pearce on Complements P. Simmons 19 3 The True Index S. N. Afriat 37 4 The Heckscher-Ohlin Model as an Aggregate J. Peter Neary 57 5 The Austrian Concept of Capital and the Pure Theory of International Trade A. G. Schweinberger 77 6 Notes on the Keynes-Ramsey Rule Christopher Bliss 93 vi Contents 7 On the Transition from an Exhaustible Resource Stock to an Inexhaustible Substitute Nguyen Manh Hung, Mu"ay C. Kemp and Ngo van Long 105 8 Capital and Walrasian Equilibrium Donald W. Katzner 123 9 On the Theory and Practice of Transfer Pricing Andre Gabor 149 10 Endogenous Exchange Rate in the Medium Term: A Weak Law of Purchasing Power Parity for the LINK System L. R. Klein, S. Fardoust and V. Filatov 171 11 Balancing the National Accounts: The Adjustment of Initial Estimates -A Neglected Stage in Measurement Sir Richard Stone 191 12 Short-term Models and Long-term Problems Alan Budd and Sean Holly 213 13 Monetary Increases and their Consequences: Streams, Backwaters and Floods 237 Victoria Chick Name Index 251 Subject Index 254 Preface The essays in this volume were presented at a conference held at the University of Southampton in January 1982 to honour the work of Ivor Pearce, who retired from the Chair of Economic Theory, University of Southampton in September 1981. At the conference Ivor Pearce also delivered a lecture entitled 'The Time Is Not Yet Ripe'. This was the first of an annual series of lectures on economic policy sponsored by the Economics Department, University of Southampton. We are grateful to many who made this conference possible. The British Academy, the British Council, BP, the Institute of Economic Affairs, Shell and Unilever all helped with financial assistance, without which the con ference would not have been possible. Of course, they do not necessarily share the views of the contributors. G. W. McKenzie and David F. Heathfield gave valuable assistance in the setting up and running of the conference. We would also like to thank Mrs Jan Gerrard, Mrs Julia Hepburn and Mrs Sarah Rollason for secretarial help in organising the conference and in preparing the manuscript. A. I. A.M.U. vii The Contributors S. N. Afriat University of Ottawa Christopher Bliss Nuffield College, Oxford Alan Budd London Business School Victoria Chick University College, London S. Fardoust University of Pennsylvania V. Filatov University of Pennsylvania Andre Gabor University of Nottingham W.M. Gorman Nuffield College, Oxford Sean Holly London Business School Nguyen Manh Hung Universite Laval A. Ingham University of Southampton Donald W. Katzner University of Massachusetts, Amherst Murray C. Kemp University of New South Wales L. R. Klein University of Pennsylvania Ngo van Long Australian National University J. Peter Neary University College, Dublin D. C. Rowan University of Southampton A. G. Schweinberger University of East Anglia P. Simmons University of York Sir Richard Stone King's College, Cambridge A.M. Ulph University of Southampton viii Bibliography of Iv or F. Pearce BOOKS A Contribution to Demand Analysis (London: Oxford University Press, 1964). International Trade (London: Macmillan, 1970). A Model of Output, Employment, Wages and Prices in the UK (Cambridge University Press, 1976); with G. Anderson, C. Stromback, P. Trivedi. The Incredible Eurodollar (London: George Allen & Unwin, 1983); with W. P. Hogan. PAMPHLET From Political Economy to Econometrics (Southampton; University of Southampton Press, 1963). PAPERS 'A new approach to the theory of the flrm', Oxford Economic Papers, 4 (1952) 252-65. 'A note on Mr. Lerner's paper',Economica, 19 (1952) 16-18. 'The factor price equalisation myth', Review of Economic Studies, 19 (1952) 111-20. 'Total demand curves and general equilibrium', Review of Economic Studies, 20 (1953) 216-27. 'Consumer's behaviour and the conditions for exchange stability - a note on Mr. Spraos' paper',Economica, 22 (1955) 147-51. 'Total demand curves-a reply to Messrs. Ozga and Lancaster',Review of Economic Studies, 23 (1955) 153-62. ix