Full text: Study week on the econometric approach to development planning

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

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