Can You Explain The General Equilibrium Method Of Shadow Prices?

To bring a balance in all the factors of production the final demand supply of factors is kept in view. For this purpose, the statistics is collected from all the sectors of the economy. The accounting price of each factor is represented in algebraic symbols and they are added. The shadow prices may be consisting of hypothetical prices of goods, factors and foreign exchange. To calculate shadow prices, the other way adopted is to represent the shadow price of each factor with algebraic symbols. Then with these symbols the demand for factors and supply of factors are expressed. The same is done in respect of demand for and supply of goods and demand for foreign exchange and supply of foreign exchange. Finally, all such demand and supplies are equated.

But it is not an easy job to calculate the demand and supplies of the economies as a whole. To find them, the planners will have to be aware of with the demand for goods, supply of goods, consumption function and production function etc. Moreover, along with changes in social set-up, the production and consumption functions may change. Therefore to determine the shadow prices by this method is a difficult task.