Factor Substitution and Relative Factor Prices

This paper examines the effects of factor endowments on factor prices in a three‐factor, two‐commodity general‐equilibrium model with endogenous commodity demand and prices. Unlike the conventional small open‐economy model that assumes constant commodity prices, factor substitution influences the direction of these effects. When a factor endowment increases, complementarity with the expanding factor benefits an unchanged factor, but substitutability harms it. If the unchanged factors are complements, there is a possibility of a rise in the expanding factor's price. A comparison of this closed‐economy model with the small open‐economy model reveals the role of international trade, which dampens the effect on the expanding factor's price.     

Comment on “The endogenous aggregate elasticity of substitution for a small open economy”

This note applies the approach of Miyagiwa and Papageorgiou [Miyagiwa, K. and Papageorgiou, C., 2007. Endogenous aggregate elasticity of substitution. Journal of Economic Dynamics and Control 31, 2899–2919] to provide simple frameworks for endogenizing the aggregate elasticity of substitution between capital and labor for a growing small open economy.     

Labor matching behavior and trade adjustment

This paper develops a model of costly trade and team production to examine the matching behavior of skilled workers in an open economy. Trade liberalization changes the supply of skilled production teams available for hire, even when firm production techniques remain fixed. As trade barriers fall, some workers choose to quit small firms in order to accept less skill intensive jobs at large firms that participate in foreign markets. Changes in worker matching behavior can explain several stylized features of firm-level adjustments to trade, with effects that are not limited to firms on the margin of exit or exporting. Trade is shown to rationalize the matching behavior of workers, leading to aggregate gains in productivity and lower prices. Openness benefits workers employed at exporting firms, however the likelihood of gaining from trade is not necessarily increasing in skill. Wages in the open economy are tied to both worker skill and job type.     

A simple aggregate demand analysis with dynamic optimization in a small open economy

We develop a very simple aggregate demand analysis of a small open economy that suffers from secular demand stagnation. It looks like the conventional Keynesian cross analysis but considers dynamically optimizing behavior of households and firms, international capital movement, and the current account adjustment. We find that parameter changes that improve the current account yield an appreciation pressure on the home currency and decrease demand for the home commodity and labor. Consequently, they worsen deflation and decrease consumption and income. This result is quite opposite to that under full employment. For example, an exogenous rise in the price of the home commodity decreases employment, consumption and income. If a country owns greater foreign assets, it suffers from less employment, consumption and income.     

Relative importance of sectoral and aggregate sources of price changes

This paper estimates a dynamic common factor model to assess relative importance of the aggregate and the sector-specific factors that determine changes in the prices of individual products. It also examines how aggregate price changes are affected by these factors. Two different specifications of the model are estimated: the baseline model with one aggregate factor, and a second specification with two aggregate factors. In the one-actor model, the aggregate factor contributes little to the movements of changes in prices, mostly of nondurable goods whereas it seems to have important contributions to the movements of changes in prices of commodity groups mainly used as intermediate or capital goods. In the specification with two aggregate factors, the additional factor has significant effects on changes in prices of ‘farm products’ and ‘processed foods and feeds’ only. Forecast-error variance decompositions of both aggregate and disaggregate price changes suggest that sectoral factors account for most of the variability at short horizons while the contributions of the aggregate factors increase as the time horizon lengthens. The results also show that sectoral factors are not only important for relative price changes but also have significant impact on aggregate inflation. The estimated common factors have statistically significant correlations with money growth and changes in the unemployment rate.     

Robots and humans – complements or substitutes?

The effect of the spread of Artificial Intelligence (AI) on wages depends on both the form of aggregate production relationships and the elasticity of substitution between human and robotic labor. With a conventional production function involving labor, robots, and ordinary capital, an increase in robotic labor can have either a positive or a negative effect on wages. Alternatively, it is possible to estimate the aggregate production relationship without measuring capital or other fixed factors explicitly, using the procedure developed by Houthakker in the 1950s. Houthakker's method is based on the probability distribution of the productivity of the variable factor. Fitting different distributions to cross-sectional data on U.S. productivity, it is shown that if the elasticity of substitution between human and robotic labor is greater than about 1.9, the burgeoning of AI technologies will cause a decline in aggregate wages, other things equal. For the manufacturing sector, an even smaller human-robot elasticity of substitution is likely to result in declining wages of industrial workers as robots proliferate.     

弹性概念的延伸——质量弹性

质量弹性表示在一定时期内一种商品的质量成本变动一定比例所引起的该商品的需求量的变动比例。质量弹性的实质是质量变动对需求量的影响程度。影响质量弹性的因素主要有消费者的收入水平、产品价格在消费者收入中所占比例、商品对消费者的重要程度、市场竞争程度。质量弹性可以分为富有弹性、单位弹性和缺乏弹性三大类。企业提高产品质量的原则是：只要利润增量大于成本增量,企业就应该不断提高质量,直到利润增量等于成本增量。企业应该分析不同时期各个市场的质量弹性,决定相应时期、相应市场的商品质量定位,在更好地满足消费者需求的同时,获得更大的收益。     

Exchange Rate Pass-through: How Much do Exchange Rate Changes Affect the Prices of Australian Exports?

Australia is generally held to be a small open economy with a high proportion of commodity exports. It is therefore regarded as a 'price taker' in international markets, and pass-through on exports is expected to be zero. This paper uses the Johansen Multivariate Cointegration technique to estimate the pass-through of exchange rate changes to the destination-currency prices of aggregate Australian exports. The results demonstrate a stable long-run pass-through level of 60 per cent, which refutes the 'small-country' assumption of Australian exporters as price takers. These findings have important implications for Australia's terms of trade and current account deficit     

Commodity Rates of Interest and Intertemporal Substitution in Commodity Demand and Consumption

This paper examines the role of commodity own rates of interest in intertemporal analysis of consumer behaviour and presents a disaggregate analysis of intertemporal substitution in commodity demand and consumption. Commodity rates of interest are defined from the Euler equations implied by the intertemporal consumer choice problem. The relationship between commodity own rates and the real interest rate is derived, and the conditions for equality of commodity own rates are discussed. The intertemporal commodity substitution elasticities are characterised using commodity rates of interest, and the intertemporal substitution elasticity of consumption is derived from its constituent commodity demands. Evidence from estimation of the demand system and the consumption function reveals high intertemporal substitution for consumer goods as well as consumption.     

中国总量生产函数模型选择*——基于要素替代弹性与产出弹性视角的研究

总量生产函数是经济增长和宏观政策的研究基础,不同生产函数模型设定可能导致不同的研究结论。本文从生产函数模型中要素替代弹性和产出弹性的隐含假设出发,系统研究了中国总量生产函数模型选择。本文研究发现：中国要素替代弹性的上下限为［08,15］,且呈现向1收敛的趋势;时变弹性生产函数模型拓展Cobb Douglas生产函数为变参数形式,可以较好地刻画中国劳动收入份额变化;Cobb Douglas生产函数、标准化CES生产函数和时变弹性生产函数模型的生产率核算结果趋于一致。本文研究为中国总量生产函数模型选择提供了理论参考和实证支持。     

Directed Technical Change

For many problems in macroeconomics, development economics, labour economics, and international trade, whether technical change is biased towards particular factors is of central importance. This paper develops a simple framework to analyse the forces that shape these biases. There are two major forces affecting equilibrium bias: the price effect and the market size effect. While the former encourages innovations directed at scarce factors, the latter leads to technical change favouring abundant factors. The elasticity of substitution between different factors regulates how powerful these effects are, determining how technical change and factor prices respond to changes in relative supplies. If the elasticity of substitution is sufficiently large, the long run relative demand for a factor can slope up.
I apply this framework to develop possible explanations to the following questions: why technical change over the past 60 years was skill biased, and why the skill bias may have accelerated over the past 25 years? Why new technologies introduced during the late eighteenth and early nineteenth centuries were unskill biased? What is the effect of biased technical change on the income gap between rich and poor countries? Does international trade affect the skill bias of technical change? What are the implications of wage push for technical change? Why is technical change generally labour augmenting rather than capital augmenting?     

Technical Progress, Price Adjustments, and Wages

Technical progress that takes place in one country is often soon transmitted to major trading partners, leading to adjustments in equilibrium commodity prices. This paper makes use of the twin concepts of differential industry effects and differential factor effects to ask about the role of each in determining how progress affects real wages. A simple diagram is utilized to illustrate in general settings the importance of factor bias in technology and the elasticity of substitution in demand in the analysis of real wage changes.     

Factor Supplies, Welfare and Output When Non-traded Intermediate Production Has Increasing Returns

This paper considers the impact of an exogenous change in the supply of primary factors on output levels, relative prices and welfare in the presence of output generated increasing returns to scale. Unlike the existing studies, this paper utilises a model of a small open economy where increasing returns do not occur in the production of a traded final good but in the production of a non-traded intermediate good. Within the context of the present study, it is shown that the Rybczynski theorem is unlikely to hold and an increase in the supply of either primary factor can harm welfare.     

Product Market Imperfection and the Two‐sector Harris–Todaro Economy

This paper examines the ramifications of market imperfection for a dual economy in the context of the two‐sector Harris–Todaro model with the agricultural (manufacturing) sector under perfect competition (monopoly). Based on a utility function of constant elasticity of substitution variety, it demonstrates (i) existence of a unique equilibrium at which the consumer price ratio and the producer price ratio are synchronized; (ii) several fundamental properties of the model (crucial to extended research on this subject area); (iii) contrary to an earlier result obtained under an oligopolistic manufacturing sector, trade liberalization for a small economy may be immiserizing.     

A general equilibrium appraisal of energy policy in Mexico

This paper develops a static neoclassical general equilibrium model of the Mexican economy that focuses on production, consumption, and exports of energy goods. The specification of the model allows the government to set prices and production levels of energy goods exogenously. Domestic prices differ from international prices, and net exports of these goods are determined residually. The level of energy exports is a major factor in the determination of the government and trade deficits. The analysis presented in this paper serves as a case study of how to design and use an applied general equilibrium model to do policy analysis. An interesting feature is that the model itself is used to determine one of the key parameters, the elasticity of substitution of non-energy imports for domestic goods.     

U.S. INCOME, SAVING, AND WEALTH, 1929—1969

The objective of this paper is to present income and expenditure accounts, accumulation accounts, and the asset side of the wealth accounts for the U.S. private national economy in current and constant prices. These accounts are integrated with the production and factor outlay accounts for the U.S. private domestic economy in current and constant prices given in our earlier papers. Taken together, these accounts constitute a complete accounting system in current and constant prices for the private sector of the U.S. economy.
Our complete accounting system incorporates a new concept of the standard of living, defined as the ratio of the quantity index of gross private national expenditures to the quantity index of gross private national consumer receipts. Our concept of the standard of living is similar but not identical to our concept of total factor productivity. Changes in the private standard of living reflect both changes in total factor productivity and changes in the proportion of the total product consumed in the public sector.     

Structural Changes in Australian Manufacturing Industry*

The paper uses a neoclassical production function and historical data to test for structural stability in Australian manufacturing industry. The production function is an extended constant elasticity of substitution form in which factor substitution elasticity, returns to scale and market structure in output, capital and labour are testable hypotheses. Tests for structural changes in homogeneity and factor substitution elasticity relations are based on overall and individual tests of covariance analysis and also on a special version of the Swerling-Kalman filtering systems as proposed by Cooley and Prescott. The empirical findings possess desirable statistical properties and indicate the existence of structural instability in the industry. The evidence also repudiates the assumptions of unitary factor substitution elasticity, constant returns to scale and market competitiveness in output and factors of production.     

Joan Robinson as a teacher

Sraffa's construct, the standard commodity, responds to Ricardo's search for an ‘invariable’ measure of value, since it is a measurement unit invariant to changes in distribution. But Sraffa suggests that there is no ‘counterpart,’ no analogous search or needed construct, for the ‘problem’ of ‘difference’ as distinct from change (‘why two commodities produced by the same quantities of labour are not of the same exchangeable value’). Difference in this sense is crucial to Marx, who distinguishes value and surplus-value from capitalist price and profit in part in order to theorize differences as systematic value transfers. In that effort, Marx repeatedly poses commodities and capitals as ‘aliquot parts’ of the whole, so that profit is a redistributed share of aggregate surplus-value. This paper shows that, when Marx's aliquot part imagery is formalized, the resulting hypothetical system represents a meaningful ‘counterpart,’ a construct with a function in Marx's analysis of difference comparable to that of Sraffa's standard commodity in analyzing distributional change. A Marxian ‘standard system’ posing each commodity as an aliquot part of the social capital (a) defines the needed labor-time unit of social account by homogenizing heterogeneous concrete labors as socially average (‘abstract’) labor while simultaneously (b) allowing the derivation of exchange-value (e.g., capitalist production price) on that scale via summation of directly and indirectly embodied labor. Indeed, Marx's approach to production prices as resulting from an inter-industry redistribution of aggregate surplus-value is shown to be algebraically identical to the calculation of labor-embodied under ‘aliquot part’ production conditions.     

Foreign aid and economic growth: The role of flexible labor supply

This paper examines the link between foreign aid, economic growth, and welfare in a small open economy. External transfers impinge on the recipient's macroeconomic performance by affecting resource allocation decisions and relative prices. The endogeneity of the labor–leisure choice plays a crucial role in the propagation of foreign aid shocks. The efficacy of foreign aid also depends on externalities associated with the public good that it helps finance. The impact of tied and untied aid on the recipient government's intertemporal fiscal balance is examined. Finally, the transitional adjustment to a foreign aid shock is shown to be sensitive to the elasticity of substitution in production and the relative importance of the labor–leisure choice in utility.     

With and without the tracks: how railroad access impacts gas price elasticity

Since 2011, gas prices have fallen 43%, raising the question of how different communities adjust their vehicle miles travelled. Data from the National Household Travel Survey’s EPA fuel economy database and the Energy Information Administration database are used to measure consumers’ elasticity to changes in gas prices. We find no significant difference between the price elasticity of individuals in cities with rail access and those without. Furthermore, we are able to rule out an elasticity in those with rail that is greater than 0.61, suggesting that rail access does not make consumer demand elastic.