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A Dual-Price Demand Theory for Economies under Transition

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  • Guy Shaojia Liu
  • Haiyan Song

Abstract

China adopted a dual-price system shortly after the economic reform started in 1978 to liberalise its price control. This led to the coexistence of both plan and market prices for an identical good in the economy. The conventional demand theory developed based on the pure market economies is not useful in explaining consumers' behaviour in the transitional economies such as China in which both plan and market prices are prevalent. This study develops an alternative demand theory for a dual-price (or dual-track) economy and derives the dual-price Slusky equation that identifies a replacement effect of price liberalisation. This demand theory distinguishes itself from the conventional demand theory and explains the ways in which consumers respond to the price liberalisation during the reform period. The new demand theory shows that the gradual approach to reform is superior to the 'Big Bang' approach in terms of reducing the 'corrected inflation' during the transition period. The new theory also suggests that the price elasticity of demand is higher in the dual-track system than that in a full market economy, implying that the price elasticity diminishes over the process of price liberalisation. This theory is tested using the Chinese aggregate consumption data.

Suggested Citation

  • Guy Shaojia Liu & Haiyan Song, 2003. "A Dual-Price Demand Theory for Economies under Transition," Journal of Chinese Economic and Business Studies, Taylor & Francis Journals, vol. 1(2), pages 185-203.
    • Handle: RePEc:taf:jocebs:v:1:y:2003:i:2:p:185-203
    DOI: 10.1080/1476528032000066703F
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    Cited by:

    1. John Bennett & Huw Dixon & Helen X.Y. Hu, 2008. "The Effects of Reforming the Chinese Dual-Track Price System," CEDI Discussion Paper Series 08-14, Centre for Economic Development and Institutions(CEDI), Brunel University.
    2. Bennett, John & Dixon, Huw & Hu, Helen X.Y., 2013. "The transition from dual-track pricing to a market system: Winners and losers," Economic Systems, Elsevier, vol. 37(1), pages 30-44.

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