Demand

IN discussing the relationship between costs and prices we were careful to stress that one must always think of demand too. Why this doubt about the role of costs? Is it conceivable that in a period of rapid growth demand could have been doing anything else but accelerating rapidly? The answer to this second question is that we are not really sure. We do know that the rate of growth of industrial production in Britain slowed after 1870 and of real national income after 1890. We shall discuss this later but it is particularly important because Britain was such a major force in world trade — in 1876–80 she was responsible for 30 per cent of world trade in primary products — and it is changes in the prices of traded goods which dominate the trends we are considering. Measurement is difficult because whereas industrial production obviously influences the prices of raw materials, food-stuffs are more likely to be affected by changes in real income. Unfortunately the latter in particular is dependent in considerable measure upon the very price movements we are seeking to explain.