Showing papers on "Price level published in 1977"

Comparative Advantage, Trade, and Payments in a Ricardian Model with a Continuum of Goods

Abstract: This paper discusses Ricardian trade and payments theory in the case of a continuum of goods. The analysis thus extends the development of many-commodity, two-country comparative advantage analysis as presented, for example, in Gottfried Haberler (1937), Frank Graham (1923), Paul Samuelson (1964), and Frank W. Taussig (1927). The literature is historically reviewed by John Chipman (1965). Perhaps surprisingly, the continuum assumption simplifies the analysis neatly in comparison with the discrete many-commodity case. The distinguishing feature of the Ricardian approach emphasized in this paper is the determination of the competitive margin in production between imported and exported goods. The analysis advances the existing literature by formally showing precisely how tariffs and transport costs establish a range of commodities that are not traded, and how the price-specie flow mechanism does or does not give rise to movements in relative cost and price levels. The formal real model is introduced in Section 1. Its equilibrium determines the relative wage and price structure and the efficient international specialization pattern. Section II considers standard comparative static questions of growth, demand shifts,

Conflict, inflation and money

Abstract: Conflict is endemic in the capitalist system and concerns all aspects of economic life : the techniques of production to be used, the length and intensity of the working day, and the distribution of income. Naturally, these are all interconnected and what happens in one sphere influences what happens in the rest, and all in some way affect the behaviour of wages and prices. So much is obvious, but, in view of the complexity of the inflationary process, the present article focuses on just one particular area, namely how conflict over the distribution of income affects the general level of prices in advanced capitalist economies. A formal model is constructed in which the following factors are combined in a coherent fashion : taxes, the terms of trade, expectations and money. In writing this article I have drawn on a wide variety of past writing on the subject of inflation, although usually without explicit acknowledgement. Amongst the works which influenced me most were: Marx's writing on the reserve army of labour, Keynes' How to Pay for the War, Maynard's Economic Development and the Price Level, Phillips' famous article on unemploy ment and wages, Wilkinson's contribution to Do Trade Unions Cause Inflation? and, finally, monetarist writing on expectations.!

The Value of Unit Price Information

Abstract: When unit prices were posted on separate shelf tags in a supermarket, consumer expenditures decreased by 1%. When unit prices were displayed also on an organized list, consumer savings were 3%. In ...

Price Behavior in the Light of Balance of Payments Theories

Abstract: The purpose of this paper is to describe the behavior of that subset of prices and price indexes that is relevant to the theory of balance of payments adjustment. The theoretical writings on the balance of payments may be viewed at this juncture as falling into two main groups -- the "standard" theories and the more recent monetary theories. Each of these is examined to determine the assumptions and predictions made about particular kinds of prices, and the empirical evidence regarding these prices is then set out. Although some assessment of the theories -- solely from the price aspect -- is offered, the emphasis is on the price structure and price behavior that ought to be captured in a satisfactory theory of the mechanisms of international adjustment. For pragmatic reasons, attention is placed mainly on the theory relating to exchange rate changes rather than on the explanation of adjustment with fixed exchange rates.

Energy Resources and Potential GNP

Abstract: dramatic change in supply conditions for energy resources since 1973 had a substantial effect on the productive capabilities of the U.S. economy. Higher prices of energy resources, relative to the prices of labor and capital resources, resulted in a loss of economic capacity and higher output prices. It has been estimated that four to five percentage points of both the higher price level and reduction in national output in 1974 were due to the increased scarcity of energy resources entailed by the quadrnpling of OPEC petroleum prices.’ The loss of national output because of energy market developments was a permanent loss. The energy price revision reduced the effective supply of resources available. Thus, the rate of output achievable by fully utilizing the nation’s resources, the “potential” output of the economy, was lowered. Conventional methods of measuring the economy’s potential have focused primarily upon the availability and productivity of labor resources. More recently such efforts have also attempted to account for the availability and productivity of capital resources. Estimates of potential output which consider the relationship of only capital and labor resources to national output are not well suited to the task of accounting for the effects of changes in the availability or cost of energy resources. Nevertheless, the Council of Economic Advisers (CEA) has recently pointed to evidence which indicates that a permanent drop in the productivity of U.S. capital and labor resources may have occurred after 1973. The CEA suggests that this drop is due to the higher cost of energy resources. 2

Stock returns, money supply and the direction of causality

Abstract: FOR MANY YEARS, the economic impact of changes in the money supply has been debated in academia. Research by Brunner [3], Friedman and Schwartz [8], Tobin [28] and others has established that a relationship exists between changes in the supply of money and changes in the prices of other assets held in an investor's portfolio.' It is generally agreed that an unexpected increase or decrease in the growth rate of money results in a change in the equilibrium position of money with respect to other assets in the portfolio of investors. As a result, investors try to adjust the proportion of their asset portfolios represented by money balances. Although investors can adjust, the system cannot since all money balances must be held. As a result, equilibrium is reestablished by changes in the price levels of the various asset categories.2 An important component in the asset portfolio of investors is the value of financial assets, including common stocks. It can be expected that adjustments in portfolios caused by changes in the monetary component will occur in this account as well as those accounts representing real goods and services. Since it also can be expected that the time response of investors may be delayed, it has been hypothe-

Stability and Exchange Rate Systems in a Monetarist Model of the Balance of Payments

Abstract: The fixed versus floating exchange rates debate appears destined for as long a life as any of the standing controversies in economics. The standard arguments are outlined by Johnson (1969) and Kindleberger (1969). This paper focuses on the effects of the exchange rate system on economic stability. We construct a simple model in which real disturbances affect the level of output each period and nominal disturbances affect the demand for money, and examine the resultant variability of the rate of consumption and the price level in a single country and in a two-country world under regimes of fixed and of floating exchange rates.

Price-Level Stickiness and the Feasibility of Monetary Stabilization Policy with Rational Expectations

Abstract: This paper considers the validity of the Lucas-Sargent Proposition, which concerns the ineffectiveness of countercyclical monetary policy when expectations are rational, under the assumption that prices are "sticky." The model of Sargent and Wallace is modified so as to incorporate stickiness as follows: in each period the price adjusts to the market-clearing value only if the latter is far from the expected value (i.e., when the cost of maintaining an inappropriate price exceeds the lump-sum cost of a revision). Otherwise the price equals the value previously expected. Given this modification, the proposition remains valid.

Inflation and the market value of the firm: theory and tests

Abstract: INFLATION CAUSES WEALTH TRANSFERS among different sectors of the economy, consisting of business firms, households and the government. Where they affect business profits, these transfers take place over and above the nominal increase in the value of the firm that follows from a general price level change. In the absence of the distortions represented by these transfers, classical theory of macroeconomic equilibrium would require that nominal equity values increase in exactly the same proportion as the price level'. Under such ideal conditions, a 10% increase in the general price level, for example, would involve a 10% increase in the nominal value of all assets. Firms would neither enjoy capital gains nor suffer losses, in real terms, as a consequence of the price level change. This is consistent with the fact that real returns from capital are dependent only on production functions and factor proportions, which are invariant to price levels. However, the presence of wealth transfers due to inflation would imply that this fundamental postulate need no longer hold: the market value of the firm would not be homogeneous of degree one in the price level. These considerations naturally raise the perennial question of whether or not common stocks are a good hedge against inflation. More generally: what is the statistical relation between inflation and stock prices? Past studies have been concerned mainly with the relation between aggregate stock market levels and inflation rates, and the results have been varied and sometimes inconclusive.2 Less attention has been paid to the fact that inflation can affect individual firms in vastly different ways. Firms differ from one another in capital structure, asset composition, and the method of reporting income for tax purposes. These variations cause differential effects of inflation on their stock prices. This paper studies these differential effects. It is important to distinguish the monetary assets and the real assets of a firm. A monetary asset is one whose amount is independent of price level changes. It includes cash, marketable securities and receivables as positive assets and debt and

Price Level Variations as Predictors of Flexible Exchange Rates

Abstract: The aim of this study is to investigate the relationship between relative price levels and exchange rates with the view of establishing the validity of the purchasing power parity theory Included in the paper is a discussion of the interpretation of such analyses in an efficient market context

Measuring the Expected Real Rate of Interest: An Exploration of Macroeconomic Alternatives

Abstract: At least since the time of Irving Fisher, it has been clear that nominal rates of interest differ from real rates not because of current or past price level changes but because of expected future price level changes. Accordingly, while nominal rates of return on fully discounted notes are observable magnitudes, expected real returns on the same notes are nonobservable. Nevertheless, real rates of return and real rates of interest are important concepts in the development of contemporary macroeconomic theory, particularly so as that theory develops richer theoretical roles for real rate and inflationary expectations measures. Furthermore, questions such as whether real rates are constant over time or are subject to systematic fluctuation through time reflect attributes of financial behavior that have important implications for understanding macroeconomic adjustment mechanisms. Even so, little attention has been given to the problem of forming and evaluating empirical measures of temporal movements in real rates of interest.' The work done by Fisher and several contemporary followers has proceeded on the premise the expected real rates of interest are constant over time. This theory has usually been examined empirically by estimating a model of the form:2

Social Security Wealth: The Impact of Alternative Inflation Adjustments

Abstract: The distribution of wealth is one of the most important and least studied features of our economic life. A lack of good data on household wealth is the primary reason for the inadequate attention to this subject. Moreover, the evidence that is available from household surveys and estate records excludes the most important asset of the vast majority of households: the value of future social security benefits. The purpose of the current paper is to present evidence on the distribution of social security wealth and to use these estimates to analyze the impact of alternative methods of adjusting future benefits for changes in the price level.

Export and Domestic Prices Under Inflation and Exchange Rate Movements

Abstract: It is almost invariably taken for granted in theoretical descriptions of the international price mechanism and in the construction of trade models that a country's export price for a particular product is identical to its domestic price Any impact of foreign or domestic events on prices is expected to fall identically on the export and the domestic price for a good In contrast to these conventional assumptions, the few empirical studies of international prices have shown that there are fairly substantial and long-lasting divergences between export and domestic price changes for the same or closely related products If there can be divergences between export and domestic prices, a type of relative price mechanism may be at work: the depreciating country should find export prices rising relative to domestic prices of the same goods Since a producer can shift more easily from domestic to export sales of a product than from production of home goods to production of export goods we should expect the changes within commodities between domestic sales and exports to occur more rapidly Since the evidence is strong that there are divergences between export and domestic prices, we wish to trace through the effects of foreign price changes and exchange rate changes on export and domestic prices and see whether a mechanism of the hypothesized type exists In this paper we concentrate our attention on price movements, but offer some evidence that the response of exports to these price divergences is in the expected direction

Comparison of historical cost and general price level adjusted cost rate base regulation

Abstract: The purpose of the present paper has been indi&'ated. We will begin with a brief description of historical cost regulation without inflation. We then examine the consequences of inflation at a rate that is known with certainty for an unregulated company, for a bond, for a public utility under historical cost rate base regulation, and for a public utility under price level adjusted cost rate base regulation. Comparative analysis of the two modes of regulation reveals that investors should be indifferent between them if the regulatory process and capital markets are free of imperfections. However, under the reasonable assumption that there are no markets in what is called human capital, the consumer is better off under price level adjusted rate base regulation than under historical cost regulation. We then introduce uncertainty as to the rate of inflation into the analysis. Once again with perfect regulation the investor is indifferent to the rate base used in determining his income on a utility share. Once again the consumer is better off under price level adjusted regulation. To anticipate the conclusion, uncertain inflation with historical cost regulation increases risk to both the investor and the consumer with the full burden of the increased risk falling only on the consumer. The analysis to this point is carried out under simplifying assumptions which will be spelled out shortly. The remainder of the paper is devoted to examining the consequences of withdrawing those assumptions which have some bearing on the conclusions reached.

Speculation and the Crawling Peg

Abstract: The objective of this paper is to determine how speculative capital flows, as described by the modern stock equilibrium theory, affect the stability of the path of the exchange rate under crawling peg systems. Because of the recent emphasis on objective indicators in discussions of reform of the international adjustment mechanism, the paper investigates this question with a single-country model in which the rate of crawl chosen by the authorities depends on both the level and rate of change of the country's reserves. The model therefore embraces as special cases a pure reserve change target system, originally proposed by Meade (1964) and Williamson (1965) and more recently expounded by Cooper (1970), and a pure reserve stock target system, exemplified by Willett's (1970) plan and the recent proposal of the US Government (1973). The principal finding of this paper is that speculative capital movements destabilize the hybrid target and the pure reserve change target systems because exchange rate expectations are likely to be partly extrapolative. Such expectations also destabilize a pure reserve stock target system if the authorities glide the exchange rate too quickly or if an upward crawl of the country's exchange rate produces a net speculative capital'inflow. Furthermore, to determine whether either condition exists requires accurate knowledge of the parameters underlying speculative capital movements. Throughout the paper I will assume that domestic variables that influence the balance of payments-output, the price level and interest rates-are exogenous. The authorities can control interest rates by employing sterilization operations, but they do not use them to prevent speculative capital flows. With the exchange rate now available for external purposes, the central bank can concentrate its monetary policy on domestic objectives.

A Note on Fisher Hypothesis and Price Level Uncertainty

Abstract: The theory on the relationship between real and nominal interest rates is based on the well-known Fisher equation: where: i = nominal interest rate; r = real interest rate; λ = percentage change in price level: P /P 0 - 1 where P and P 0 denote end-of-period and current levels of some aggregate price index, respectively.

The relationship between the price and demand for natural gas: A partially controlled study

Abstract: Since the onset of the energy crisis, indicated by the start of the Arab oil embargo, the price of natural gas increased for most residential consumers. the relationship between price and monthly demand over five years is examined for a sample of almost identical owner-occupied town houses in a planned community in central New Jersey, USA. It is shown that, since the onset of the energy crisis, the average price, in current dollars, of gas has increased in the USA, and the average demand has decreased, leading to a significant negative estimate of elasticity. However, this disappears if the effects of overall inflation on demand are removed. Closer examination reveals that the relationship between current price and demand is not linear, since the major decrease in demand occurred during the winter immediately following the embargo, but the major increases in current price occurred during subsequent winters. Whether the large reduction in demand is due to price increases, overall inflation, or is a response to conservation appeals by US public officials is an open question. No short-term effects of price on demand are found.

A Simple Model of Monetary Dynamics: Comment

Abstract: This paper develops a dynamic model that integrates the Keynesian IS-LM model with the Friedman-Phelps natural rate hypothesis and the Cagan adaptive expectations model. Behavioral relationships in the economy are represented by a system of differential equations that determines the time response of endogenous variables to a change in the rate of monetary growth. In the short run, an increase in the rate of monetary expansion produces a decline in the interest rate and a higher level of real output. But, in the long run, there is no effect on real output, and both the rate of inflation and rate of interest increase by the amount of increase in the rate of monetary growth. Studying the dynamic properties of the system gives conclusions previously reached by Friedman. If the monetary authority chooses to control the nominal money supply or the inflation rate (the price level), the system is stable. If the monetary authority attempts to peg either real money balances, the real or nominal interest rate, or real income, the system is unstable. On the other hand, a desired long-run level for the nominal interest rate or for real money balances can be achieved indirectly by choosing the appropriate rate of inflation.

Impact of natural gas curtailments and price increases on irrigated agriculture in texas

Abstract: We have calculated the expected effects of various natural gas price increases and supply curtailments for irrigation in the Texas High Plains and Trans-Pecos regions. In the High Plains, each 5% reduction in supply will reduce the irrigated area by about 5% and net returns by about 3%. If crop prices remain at 1976 levels, appreciable increases in natural gas prices will reduce producers’ returns, but will leave the High Plains a major irrigated region. However, the shift to dryland production would be much more pronounced at crop price levels prevalent in 1971–74, with irrigated area declining by 80% for a natural gas price of $3.00/Mcf. The effect of a natural gas price increase will be more severe in the Trans-Pecos, where it can be expected that many producers will be forced out of business. A natural gas price of $1.85/Mcf in the Trans-Pecos will make production costs for all major crops exceed 1976 crop prices.