The Effects of Reforming the Chinese Dual-Track Price System

— —

x  xx

P ≡ —p H--p.

Here, since X is representative of the basket of DTP goods, we shall refer to P
interchangeably, as the consumer price index (CPI) or the average price, according
to context. However, when we consider heterogeneous households in Section 3, the
average prices paid will differ across households and so we shall define the CPI to
be a weighted average of these average prices.

The condition for market clearing is

—[p, 1 + (p — p)—] = —^s(p).

This is depicted in Figure 2, where U is an indifference curve and the equilibrium
occurs at E .Here,P is represented by (minus) the slope of the line connecting
E with the endowment point on the y-axis. This is the ratio, when consuming —,
of the amount of Y forgone to the quantity —.Giventhat—^s > ——, we have that

⁸ Here, we use a linear function for the weighted average price P , but other formulae, such
as Cobb—Douglas, could be used. The important thing is that P should depend on both the
plan-track and the free-market prices.

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