 Hicks conducts to derive his stability conditions he accords the numéraire -the standard commodity- a special role. In this section we shall consider the precise deficiencies in the statical information provided by the Hicks conditions. This is best established by considering the comparative statics theorems implied by the Hicks conditions. Consider the equilibrium system
where, again, the Bi's are balances of payments, the p's are exchange rates, and alpha is a parameter.
Differentiation of (11) with respect to alpha yields
and the solutions for the exchange-rate changes are
Now consider an increase in demand for the currency of country i such that deltaBi / delta alpha > 0; while the excess demand for every other currency, at given exchange rates, is unchanged (deltaBj / delta alpha = 0 for i not= j). Then, instead of (13), we have simply
By the Hicks conditions of imperfect stability Deltaii /Delta < 0, so deltaBi / delta alpha > 0 implies dpi / d alpha > 0. Thus an increase in demand for the currency of the ith country raises the price of that currency after adjustment of all other exchange rates has been allowed for.
Similar implications follow from the conditions of perfect stability if we hold various subsets of other exchange rates constant relative to the numéraire. If, for example, the exchange rates of countries k, . . ., n are held constant, we get, instead of (14), the equation
the inequality being an implication of one of the conditions of perfect stability.
How can an increase in demand occur in a closed system ? Clearly only at the expense of other commodities (currencies) in the system. Cournot's law (or Walras' law in the context of the Walrasian system) ensures that
where the summation, it should be emphasized, extends over all the commodities. The interpretation of (14) is therefore that an increase in demand for (say) pounds (the currency of country i) at the expense of dollars raises the dollar price of the pound. Now if other exchange rates are held constant relative to the dollar, the proposition holds, if the Hicksian perfect stability conditions are satisfied, when the shift of demand is interpreted as being from the dollar and all currencies whose exchange rates are kept fixed to the dollar. Note, however, that the Hicks conditions do not give us the sign of
so that we cannot specify, on the grounds of the Hicks conditions alone, whether a shift of demand from dollars to pounds raises or lowers the price of (say) the franc relative to the dollar.
But now we are in a position to see the narrow form of the mathematical implications of the Hicks conditions. Consider a shift of demand from the franc (currency j) to the pound (currency i). Then deltaBs / delta alpha = 0 for s not= i, j, while deltaBi / delta alpha = - deltaBj / delta alpha >0 in view of (16); with no loss of generality we can make deltaBi / delta alpha = - deltaBj / delta alpha = 1. Substitution in (13) then gives the change in the dollar price of the pound and the franc:
The Hicks conditions do not provide us with the sign of either (18) or (19), nor, by analogy to (17), should we expect them to. But, by analogy with (14), we should expect the difference
to be unambiguous in sign for any system in which units are chosen so that each ps = 1, initially. When demand shifts from the franc to the pound, we should not expect to be able to predict the sign of the change in the dollar price of the pound or franc, but we should be able to determine, on the basis of the Hicks conditions, the sign of the change in the franc price of the pound, the expression given in (20). But the Hicks conditions are no help here, and this means that Hicks has not developed the mathematical implications of extending his method to the standard commodity.
The same information problem applies, a fortiori, when various subsets of prices are held constant. An implication of the Hicks condition of perfect stability is that a shift of demand onto pounds raises the price of the pound even when various currencies remain pegged to the dollar; this amounts to treating