The Italian Automotive Industry and Economies of Scale

This article investigates scale economies in the Italian automobile industry as well as substitution possibilities between inputs and direct and cross-price elasticities of factor demand, utilizing a cost function with capital, labor, domestic, and imported intermediate goods inputs. Continuing European integration makes economies of scale an important issue. The study results are consistent with economies of scale in the Italian motor vehicle industry, a particularly interesting finding because the Italian automotive industry consists primarily of one firm, Fiat. The estimated direct price elasticities suggest that capital is most responsive to own price changes, and estimated cross elasticities imply that all inputs are substitutes. (JEL D 2, L 6, O 1)     

Production and costs in the South African motor vehicle industry

This study investigates the existence of economies of scale in the South African motor vehicle industry as well as the substitution possibilities between input pairs and the direct and cross-price elasticities of demand for the various inputs. Because of data limitations, a translog cost function was estimated for only a three input model corresponding to a homogeneous production function involving capital, labour and intermediate goods. The issue of the existence of economies of scale in the South African motor vehicle industry is a particularly important one because South Africa once again is a member of GATT and a full participant in the international trade arena. The null hypothesis of constant returns to scale was rejected at the 0.5% level of significance. Thus, the results of this model are certainly consistent with economies of scale in the South African motor vehicle industry. The estimated direct price elasticities were consistent with the hypothesis that, during the past two decades, capital was the productive factor with the most elastic demand, and the estimated cross-elasticities between input pairs generally supported the hypothesis that all inputs are substitutes.     

Cost relationships and globalization in the Australian clothing industry

Australia developed a substantial clothing industry with protectionist international trade policies, including prohibitively high tariffs, quotas, and subsidies. The industry became an important source of jobs, with over 6.5 per cent of total manufacturing employment at the close of the 1960s. As Australia has moved towards freer trade, employment in clothing production has fallen substantially. The question of whether the clothing industry can remain viable in its new environment became an important issue. Here, we examine two crucial economic considerations relating to that question: economies of scale and relations (substitute/complementary) between the various inputs, both domestic and outsourced foreign. The findings strongly indicate the presence of economies of scale and that the industry has reduced its unit costs over the period of study. The results also suggest that most of the inputs are substitutes for one another, although only the estimated cross price elasticities between capital and labour are highly statistically significant in both models utilized in the study. To be successful in the future, the Australian clothing industry will likely need to find market niches where it can offer superior products and/or service as well as further reduce its unit costs.     

FIRM SIZE AND EFFICIENCY IN THE SOUTH AFRICAN MOTOR VEHICLE INDUSTRY*

The South African motor vehicle industry has historically been considered a critical industry in the South African economy and the target of numerous government policies designed to protect it and/or increase its international competitiveness. This study examines the cost performance of firms in this industry according to their size, using data categorised by output level. The results are consistent with statistically significant economies of scale at the lowest output levels and a cost inefficiency averaging from about seven to nine per cent for all firms. The findings also suggest that all else equal, the smallest firms and the largest firms have lower unit costs than mid‐sized firms. While this work suggests that policies that would give incentives for the smallest firms to increase their scale of operations might help to reduce their unit costs, further investigation needs to be done with respect to why firms in the mid‐level size categories appear to be less efficient.     

Scale properties and input substitution in mexican electrical equipment manufacturing

This paper investigates the existence of scale economies in the Mexican electrical equipment industry and estimates direct and cross price input demand elasticities using a translog cost function. Although the estimated value of the cost elasticity was consistent with economies of scale, it was significantly less than 1 only at a significance level slightly greater than 5 percent. The estimated cross price elasticities indicated that all of the inputs were substitutes. Nevertheless, while lower trade barriers under the North American Free Trade Agreement, ceteris paribus, may have a short-term adverse effect on the demand for labor in this industry by increasing imports of cheaper capital and intermediate goods, the relatively low values for E_LK and E_LM also support the conclusion that the impact on employment may be relatively small.This project was supported by the Faculty Development Leave Program at the University of Texas at San Antonio.     

The Spanish automotive industry: scale economies and input relationships

This paper investigates the existence of economies of scale in the Spanish automobile industry as well as the substitution possibilities between input pairs and the direct and cross price elasticities of demand for the various inputs by estimating a translog cost function for both a three input model involving capital, labour, and intermediate goods as well as a four input model where energy is separated from other intermediate goods. The results of this study are consistent with the hypothesis of economies of scale in the Spanish automobile industry, particularly at the low and mean levels of output. These results also are consistent with the hypothesis that capital is a substitute for the other inputs, but that labour and intermediate goods are complements. Labour and energy also appear to have a complementary relationship over most of the data points in this study. The significance of a complementary relationship between labour and intermediate goods is that any attempt by the Spanish government to restrict imports of these inputs, resulting in higher domestic prices for them, may aggravate an already serious domestic unemployment problem.     

Dynamic factor demands and adjustment costs: An analysis of bell Canada's Technology

In this paper a dynamic model of production is estimated for Bell Canada. The dynamics arise from the costs of adjustment associated with capital expansion. Estimation results showed that there are significant adjustment costs. Thus, the hypothesis of long-run cost minimization is rejected. As Bell Canada increases its capital stock by $1, there are additional adjustment costs of $0.36. This result implies that Bell Canada minimizes the present value of production and adjustment costs which results in a short-run equilibrium position. Price, substitution and output elasticities are estimated. In the short-run the inputs are substitutes and the price effects are highly inelastic. Overshooting occurs with respect to labour and material demands in the short-run since the demand for capital responds very little to output expansion. Returns to scale are also estimated in this cost of adjustment model. Bell Canada exhibits increasing returns to scale initially and then decreasing returns such that on average there are constant returns to scale with a scale elasticity of 1.08.     

The effects of U.S. shocks on Canadian total factor productivity growth: The case of the electrical products industry

This paper examines the influence on domestic total factor productivity of foreign income and price variations. The underlying model is a temporary equilibrium model of a pricediscriminating monopolist, who faces two markets with different demand elasticities, a fixed capital stock and economies of scale. A reduced form decomposition of total factor productivity growth is derived. The model is estimated on the data of the Canadian electrical products industry from 1962 to 1981. The results indicate that foreign variables played only a minor role in the growth of total factor productivity but were partly responsible for its post 1973 recorded slowdown. The U.S. industry price rise retarded considerably the Canadian total factor productivity growth in the electrical products industry.     

The changing structure of cost and demand for the U.S. telecommunications industry

This paper formulates a multiproduct structural model to examine the evolution of the structures of production and demand and their dynamic interaction, over an extended period, 1935–1987, in the U.S. telecommunications industry. We estimate the degree of scale economies, cost elasticities, input price elasticities and the determinants of demand for outputs and for various factors of production. The contributions of the quasi-fixed inputs, such as R&D and physical capital, in the evolution of this industry are evaluated. A number of important issues like the changing characteristics of demand for and cost of local and toll services and the variation of price–cost margin over time are examined under different economic conditions, market structures and regulatory environments. We also analyze the effects of the 1984 divestiture of the Bell System on the cost structure, employment and capital formation of the U.S. telecommunications industry.     

A cost-based analysis of scale economies in the French auto industry

This paper examines cost relationships in the French automobile industry using a translog cost function with domestic capital and labor and domestic and foreign intermediate goods inputs. The findings suggest scale economies at lower output levels, but diseconomies at mean and maximum output levels. Cross price elasticity estimates implied all input pairs except capital and foreign parts and labor and domestic parts are substitutes. Except for foreign components, direct price elasticity estimates were inelastic. Thus, further integration of Europe and reduction of foreign input prices may substantially increase their quantity demanded and decrease the demand for domestic labor and parts.     

Economies of scale in Norwegian electricity distribution: a quantile regression approach

In this article, we investigate scale economies in Norwegian electricity distribution companies using a quantile regression approach. To the best of our knowledge, this is the first attempt to apply this estimation technique when analysing scale economies. We estimate the cost elasticities of the two output components: network length and number of customers, to calculate returns to scale. Our results show large potential of scale economies, particularly for the smallest companies. We also find that returns to scale is increasing over time. These findings have important implications for policymakers when they are deciding the structure of the industry in the future.     

Public Hospital Costs in Two Australian States

This study examines the long-run and short-run behaviour of public hospital average costs in two Australian States: Victoria and Queensland. Using adjusted weighted inlier-equivalent separations as a measure of hospital output, and floor area as a measure of capacity, the study finds a hump- or '∩'-shaped long-run average cost curve at the 5 per cent significance level in both data sets. The study also finds a saucer- or '∪'-shaped relationship between capacity utilisation and short-run average cost at the 5 per cent level.     

COMPARING PARTIAL AND GENERAL EQUILIBRIUM ESTIMATES OF THE WELFARE COST OF INFLATION

Reserve banks worldwide have been moving towards zero inflation policies. Confusion clouds the welfare cost of maintaining such inflation policies despite the best attempts at clarification. Monetary theory research has shifted from partial to general equilibrium economies. This shift has left the partial equilibrium estimates of the welfare cost of inflation below most of the general equilibrium estimates. Put on a comparable basis, partial equilibrium estimates compare more closely with the general equilibrium estimates. Furthermore, evidence suggests that integration under the money demand function appears applicable in general equilibrium economies. Finally, the estimates depend on the elasticities of money demand and the underlying structural parameters.     

Accounting for Growth in the Australian Wine Industry, 1987 to 2003

A computable general equilibrium model of the Australian economy is used to account for the dramatic growth in Australia's wine industry between 1987 and 1999, and to project grape and wine volumes and prices to 2003. Export demand growth has made a major contribution to total output growth in premium wines, and accounts for most of the increase in the producer price of premium red wine. Domestic consumer preferences have shifted, mainly towards premium red wine, but there is also some evidence of growing demand for premium white wine since the mid 1990s. From the perspective of producers, productivity growth, while being less important than growth in domestic demand, appears to have more than offset the negative effects on suppliers of wine consumer tax increases. From the domestic consumers' perspective, however, tax hikes have raised retail prices much more than productivity gains have lowered them. The high and sustained levels of profitability resulting from export demand growth have led to a massive supply response in Australia. Even so, by 2003 Australian wine output will still be less than 5 per cent of global production.     

The Spanish Textile Industry Sans ATC Quota Protection

The Spanish textile and apparel manufacturing sectors have been badly impacted by the global recession as well as the removal of quotas that were in place with the Agreement on Textiles and Clothing (ATC). This study employs a cost function to investigate the presence of scale economies and the interrelationships among inputs of domestic capital, labor, and intermediate goods as well as outsourced (imported) intermediate products for the Spanish textile industry in a global environment that has become increasingly competitive. While there is evidence of scale economies at low output levels, there is also some evidence consistent with diseconomies of scale at the highest output levels. All of the inputs appear to be substitutes for one another except for domestic capital and outsourced intermediate goods. An important finding is that the demands for both labor and domestic intermediate goods have become increasingly sensitive to the prices of outsourced inputs. The estimated coefficients of dummy variables indicate that reduced international trade restrictions have put downward pressure on unit cost for the industry in recent years. These results suggest that the Spanish textile industry and its domestic suppliers will be increasingly challenged by international competitive pressures.     

The impacts of imports and trade liberalization in Brazil: Insights from an aggregate cost function

Brazil has faced and continues to struggle with difficult economic challenges, including achieving noninflationary economic growth and a manageable external deficit. This paper presents the results of the estimation of an aggregate translog cost function with inputs of domestic capital and labor and imports and outputs of consumption and investment goods. The resulting calculated elasticities give insights into the relationships among the inputs, as well as the possible impacts of further reducing international trade barriers. The findings suggest that all of the inputs are substitutes for one another and that an increase in imports may have at least short-run negative effects on the demand for domestic capital and labor. However, imports appear to be particularly important in the production of investment goods, so an increase in imports may result in a more than proportionate increase in the output of those products and enhance the long-term growth of the economy. The responses to current challenges facing Brazil will affect its future economic growth as well as have a broader impact on the international scene. The results described here may help to inform policy makers as they address these issues, particularly with respect to international trade policies.     

Scenario Analysis of Chinese Passenger Vehicle Growth

This article reports on a simulation and scenario analysis of Chinese passenger vehicle growth and resulting energy demand and CO₂ emissions. The model includes provincial level logistic growth functions with saturation levels representative of neighboring Asian economies, income growth measured in international dollars, and both estimated and literature-based income elasticities. Scenarios explore variation in key parameters, including income and population growth rates, elasticity income ranges, fuel economy, and vehicle saturation. Countrywide base case results estimate growth from 4.22 to 54.33 passenger vehicles per thousand people from 1995 to 2025. Resulting passenger vehicle oil demands and CO₂ emissions increase nearly 17-fold.     

Economies of Scale in Australian Banks 1978–1990

This paper examines economies of scale in Australian banks. A bank multi-product cost function is estimated using a translog functional form with data drawn from twelve banks spanning the period 1978 to 1990. Different formulations of the model are estimated. Results prove sensitive to estimation assumptions and data definitions however they support the presence of economies of scale for Australian banking in this period     

Procompetitive Effects of Foreign Competition on Domestic Markups

A short-run model for estimating the procompetitive effects of foreign competition on markups in an oligopolistic, domestic industry is developed and estimated using data on the Australian automobile industry. Estimates reveal that these effects are rather large and cannot be ignored when predicting the effects of a shock affecting foreign costs. These estimates can also facilitate inferences about the nature of interfirm rivalry.     

Modelling money demand for a panel of eight transitional economies

In this article, we estimate money demand functions for a panel of eight transitional economies, using quarterly data for the period 1995:01 1995 to 2005:03. We find that real M1 and real M2 and their determinants, namely real income and short-term domestic interest rate, are cointegrated, both for individual countries as well as for the panel. Long-run elasticities suggest that consistent with theory, real income positively and nominal interest rate negatively impact real money demand. Our test for panel Granger causality suggests short-run bidirectional causality between M1 and M2 and their determinants. Finally, our tests for stability of the money demand functions reveal more cases of unstable money demand functions when M2 is used as a proxy for money demand.