Full household equilibrium

Abstract

AbstractDeveloping ideas suggested by James Meade, Harry Johnson and Neil Laing, we argue that when one compares alternative long‐period positions, as in the work‐horse two commodity, two primary input model, the household's expenditure and the prices of the commodities purchased cannot be treated as independent variables. We call such a full adaptation of households to consistent price configurations ‘full household equilibrium’. It is found that, at both the household and the aggregate levels, the purchased quantity of a ‘normal’ commodity can increase when its relative price rises. This basic result is readily applied both to aspects of welfare theory and to international trade theory.