A New Approach to Modelling Gnp Functions: an Application of Two-Stage Technologies and Modifying Function Framework

This paper first demonstrates that two-stage technologies together with Lewbel's modifying function framework can provide a general procedure for combining profit functions and nominal value-added functions to obtain new specifications of GNP functions suitable for empirical trade analysis. Next, it illustrates the usefulness of this procedure by proposing a new parametric form of a GNP function in which the derived import demand and output supply systems can be easily constrained to be regular, and the functional structure is parsimonious in the number of additional parameters. We also compare our estimates with those obtained using the familiar Translog flexible form. Results indicate that the proposed procedure is feasible and promising as a tool for generating regular and realistic import demand and output supply equations.