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A Dual-Price Demand Theory for Economies under Transition

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Author Info
Guy Shaojia Liu
Haiyan Song

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Abstract

China adopted a dual-price system shortly after the economic reform started in 1978 to liberalise its price control. This led to the coexistence of both plan and market prices for an identical good in the economy. The conventional demand theory developed based on the pure market economies is not useful in explaining consumers' behaviour in the transitional economies such as China in which both plan and market prices are prevalent. This study develops an alternative demand theory for a dual-price (or dual-track) economy and derives the dual-price Slusky equation that identifies a replacement effect of price liberalisation. This demand theory distinguishes itself from the conventional demand theory and explains the ways in which consumers respond to the price liberalisation during the reform period. The new demand theory shows that the gradual approach to reform is superior to the 'Big Bang' approach in terms of reducing the 'corrected inflation' during the transition period. The new theory also suggests that the price elasticity of demand is higher in the dual-track system than that in a full market economy, implying that the price elasticity diminishes over the process of price liberalisation. This theory is tested using the Chinese aggregate consumption data.

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Publisher Info
Article provided by Taylor and Francis Journals in its journal Journal of Chinese Economic and Business Studies.

Volume (Year): 1 (2003)
Issue (Month): 2 (January)
Pages: 185-203
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Handle: RePEc:taf:jocebs:v:1:y:2003:i:2:p:185-203

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Related research
Keywords: Dual-Track Demand Theory; Transition Economies; Price Elasticity;

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References listed on IDEAS
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  3. Lau, Lawrence J. & Qian, Yingyi & Roland, Gerard, 1997. "Pareto-improving economic reforms through dual-track liberalization," Economics Letters, Elsevier, vol. 55(2), pages 285-292, August. [Downloadable!] (restricted)
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  4. Portes, Richard & Santorum, Anita, 1987. "Money and the consumption goods market in China," Journal of Comparative Economics, Elsevier, vol. 11(3), pages 354-371, September. [Downloadable!] (restricted)
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  5. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May. [Downloadable!] (restricted)
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  8. Song, Haiyan & Liu, Xiaming & Romilly, Peter, 1996. " A Time Varying Parameter Approach to the Chinese Aggregate Consumption Function," Economic Change and Restructuring, Springer, vol. 29(3), pages 185-203.
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  1. John Bennett & Huw Dixon & Helen X.Y. Hu, 2008. "The Effects of Reforming the Chinese Dual-Track Price System," CEDI Discussion Paper Series 08-14, Centre for Economic Development and Institutions(CEDI), Brunel University. [Downloadable!]
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