PONTIFICIAE ACADEMIAE SCIENTIARVM SCRIPTA VARIA - 28
effects of prices appear implicity, however, in the projection
of input-output coefficients, which will also be discussed in
section 4. There is, of course, nothing final about this arrange-
ment; it is simply a reflection of practical difficulties.
In terms of diagram 4, we see total consumers’ expenditure
and domestic prices coming together to determine consumption
demands. The level of consumers’ expenditure is fixed by
assumption and left unchanged through each run of the cal-
culations, but relative prices can, initially, only be guessed at.
However, as the model simulates the productive process, it
ouilds up a cost structure in each branch of activity and this
makes it possible to revise the initial estimates of prices, as fol-
lows. Given an average wage rate as a unit of account and
the corresponding rates of profit implied by the efficient distri-
bution of labour and assets, we work out the future costs of
labour and capital per unit of output in each industry and
thus obtain values added per unit of output. To these we add
the cost of intermediate inputs and of indirect taxes and thus
obtain the cost, or price, of a unit of output in each industry.
[f these new domestic prices are different from those we had
assumed at the start, we must alter the figure for total consu-
mers’ expenditure to correspond, and repeat the cycle of cal-
culations until our estimates of prices cease to change.
If in the model future consumption is to be sensitive to
future prices, two things are needed: 1) a set of price-sensitive
demand functions; and 2) a set of future prices. Let us now
see how each of these requirements is met. In the following
treatment I shall restrict myself to private consumption and I
shall find it convenient to set out the analysis on a per head
basis; to apply the results to the whole community all that is
needed is to multiply them by the population.
As explained in [7], our model of consumers’ behaviour is
a variant of the linear expenditure system which allows expli-
1] Stone - pag. 50
