The Effects of Reforming the Chinese Dual-Track Price System

has changed to minus the slope of BG, and therefore the CPI has increased.¹⁰

Fig 3 about here.

Our analysis indicates that if the plan-track price of a good is raised, the price
observed in the market will fall, but that the CPI will rise. In a fuller model,
however, the role of commodity Y might be specified further. Suppose that Y
is leisure time for the urban household and that leisure is normal. A rise in p
results in a fall in the quantity of leisure consumed; i.e., there is an increase in the
quantity of urban labour supplied. If the supply of manufactures therefore rises,
this will have an offsetting, negative, effect on the price level for the economy as a
whole. A reduction in x has similar effects.

As an illustration of these effects, consider the ‘first-round inflation’ that oc-
curred in China in the late 1980s and was regarded as a major set-back to Chinese
economic reform (Bell et al., 1993, and Jaggi et al., 1996). In contrast to the
‘second-round inflation’ in 1995, which is generally attributed to over-investment
in urban areas (Gang, 1994) this was primarily caused by changes in government
policy under the dual-track system. To bolster incentives for farmers, from 1979
onwards, the government increased procurement prices and permitted farmers to
¹⁰The discussion of the diagram here does not cover what happens if the supply of X changes.
However, as long as the transitional market price falls, the respond of supply has no effect on
our results.

14

<<   13   14   15   16   17   18   19   >>

More intriguing information