Prices, Social Accounts and Economic Models

Despite the fact that SAMs are widely used as the databases for CGE models there remains some confusion over the relationship between the two; in particular the implications and meaning of the 'law of one price’ appear to be poorly understood. This has two clear, and arguably, worrying implications. First, a deficiency in understanding the accounting relationships in a SAM means that when compiling a SAM it is likel that the structural relationships in the economy may be misrepresented. And second, any misunderstanding of the behavioural relationships in a CGE model, which can be defined as theory with numbers, is highly likely to lead to flawed interpretations of the results from such models. The discussion in this paper revisits the issues of the role of a price system in social accounts and then demonstrates how the resultant price definitions require that all whole economy models that satisfy the conditions of being both complete and consistent MUST obey the 'law of one price’. The relevance of the 'law’ to the characteristics of certain features of CGE models is demonstrated as is its relevance to the compilation of SAMs.