Full household equilibrium

Abstract

Developing 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.