Walrasian and Marshallian Stability: An Application to the Australian Pig industry

The Global Correspondence Principle of Samuelson states that global comparative static results hold even in the absence of an initial stable equilibrium. This principle has been applied in recent studies of international trade with variable returns to scale to resolve paradoxical results with respect to the Rybczynski and Stolper-Samuelson theorems. Takayama and Ide have shown that the principle may only apply if the initial equilibrium is Marshallian stable. This has implications for economic forecasting, in that forecasts of prices and quantities may only be valid in the presence of Marshallian stability. We estimate a Vector Error correction Model of the Australian pig industry and examine the stability of the model in both the Walrasian and Marshallian sense. We find that prior to the introduction of imports in 1990, the farm gate market was characterised by both Walrasian and Marshallian stability and after 1990 it was unstable in both senses. This suggests that market forecasts since 1990 need to be viewed with more than the usual caution.