The Effects of Reforming the Chinese Dual-Track Price System

unclear here. However, denoting the compensated Slutsky term by S , we have⁶

xp = S - xxm.

Eliminating xp , we therefore obtain

dx

= = S — (x — x)x_m < 0.
dp

Since S < 0, we have that dx/dp < 0. The presence of the DTP quantity X in (4)
makes the income effect of a market price change smaller, since it only applies to
the market-track portion of consumption. It also implies that the effect on demand
of a market price change is smaller under DTP than under a full market regime.

2.1 The Supply Function

Under DTP, some output is supplied at the plan-track price, but we assume that
total supply will be determined by the marginal price p, i.e., by the market price.
The supply function (in per household terms) is assumed non-decreasing in p; that

⁶Adifferent form of Slutsky equation for DTP is formulated by Liu and Song (2003). Whereas
we specify market price as the parameter that is varied, in their specification the plan-track
quantity plays this role. Also, whereas we have the household’s total demand for X as the
endogenous variable, they have the household’s market demand.

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