Henry, We all get carried away sometimes. No apology necessary.

]]>“I really don’t need to be instructed about microeconomics 101.”

I have overstepped the mark.

I apologize.

I will leave it at that.

]]>Henry, Sorry to be blunt, but you really don’t seem to grasp the difference between general equilibrium and partial equilibrium. In addition, a budget constraint relates to individual households not to an entire economy. It is the PPF that occupies the role of a budget constraint for a macro model. Under assumptions that would allow for the construction of a community social welfare function (basically the assumptions that make a representative agent a coherent, if not very useful, assumption) it is the PPF that would play the role of that a budget constraint plays for a household. Finally, I really don’t need to be instructed about microeconomics 101.

]]>“Again, you aren’t correctly specifying a GE model is specified or how it is solved.”

The theory isn’t called the General Equilibrium Theory for no reason.

What you describe above is the partial equilibrium approach. Walras’ equations are not formulated in partial equilbrium terms. General equilibrium can be expressed as in the form of a PPF and a BC. This is Microeconomics 101. I think your distinction is trivial.

“GET does not assume that resources are fully employed in equilibrium. It is a theorem that GET proves given the more basic assumptions that the model assumes.”

Again this is a trivial distinction. Equilibrium will always be found on the PPF, that is where there is full employment of resources.

]]>Henry,

The objective functions that are optimized are household utility functions and firms profit functions. The PPC may be inferred from the assumed production technologies and the resource endowments underlying the model, but there is no PPC function in a GET model merely production functions and resource endowments that determine the supplies offered by firms as functions of output and input prices. Again, you aren’t correctly specifying a GE model is specified or how it is solved.

And again, GET does not assume that resources are fully employed in equilibrium. It is a theorem that GET proves given the more basic assumptions that the model assumes. You might as well say that geometry assumes that the triangles angles of a triangle sum to 180 degrees or that it assumes that the sum of the squares of two sides of a triangle equal the square of the hypotenuse.

Your explanation is almost topsy turvy.

“I don’t understand how a GET model can “assume” that income is given.”

For optimization, an objective function is required (the PPC), to which a constraint is applied, the budget constraint, based on a given level of income. Without a given level of income optimization cannot be performed.

Relative price determination only makes sense in terms of an optimization.

The determination of an equilibrium point requires optimization.

“That is an implication of utility maximization by households, profit maximization by firms”

That is exactly what I am saying – at full employment.

” You may or may not like it but the income effect is part of the analysis whereby the equilibrium price vector is determined because it is only the equilibrium price vector that entails that excess demands for all goods with a positive price be zero. ”

Hicks/Slutsky applies to individual demand curves. It describes the composition of the price effect AT A GIVEN LEVEL OF INCOME. I did say the income effect is part of the analysis but it is given by the relationship between the price of the good and a given level of income (otherwise it is nonsensical.)

“Finally, I’m sorry, Henry, but you are not the arbiter of what assumptions are allowed in a GET model.”

I didn’t say I was. But the standard GET model does have specified assumptions.

]]>Again, there is no assumption that in GET production is on the PPF. That is an implication of utility maximization by households, profit maximization by firms, price taking behavior by all agents, the absence of externalities, etc. In order for this result to obtain, the system has to be solved for a set of equilibrium prices. At those equilibrium prices, full employment, and pareto optimality are implied, not assumed.

Hicks/Slutsky is a mathematical relationship that emerges from a constrained optimization exercise in which a household maximizes its utility subject to a budget constraint when the price of one of the consumption goods demanded by the household changes. That relationship which divides the effect of a price change into a substitution effect and an income effect resulting from the price change. The substitution effect is always negative, but the income effect can be positive or negative. Depending on the sign of income effect, goods can be classified as you indicate. You may or may not like it but the income effect is part of the analysis whereby the equilibrium price vector is determined because it is only the equilibrium price vector that entails that excess demands for all goods with a positive price be zero. Solving for the equilibrium price vector requires calculating excess demands at alternative prices in order to find the particular price vector that equates all excess demands equal to zero.

Finally, I’m sorry, Henry, but you are not the arbiter of what assumptions are allowed in a GET model.

philipji, Sorry, but I searched for it in the link that you sent and again was unable to find it.

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