Ever since Richard Stone (1954) first estimated a system of demand equations derived explicitly from consumer theory, there has been a continuing search for alternative specifications and functional forms. Many models have been proposed, but perhaps the most important in current use, apart from the original linear expenditure system, are the Rotterdam model (see Henri Theil, 1965, 1976; Anton Barten) and the translog model (see Laurits Christensen, Dale Jorgenson, and Lawrence Lau; Jorgenson and Lau). Both of these models have been extensively estimated and have, in addition, been used to test the homogeneity and symmetry restrictions of demand theory. In this paper, we propose and estimate a new model which is of comparable generality to the Rotterdam and translog models but which has considerable advantages over both. Our model, which we call the Almost Ideal Demand System (AIDS), gives an arbitrary first-order approximation to any demand system; it satisfies the axioms of choice exactly; it aggregates perfectly over consumers without invoking parallel linear Engel curves; it has a functional form which is consistent with known household-budget data; it is simple to estimate, largely avoiding the need for non-linear estimation; and it can be used to test the restrictions of homogeneity and symmetry through linear restrictions on fixed parameters. Although many of these desirable properties are possessed by one or other of the Rotterdam or translog models, neither possesses all of them simultaneously. In Section I of the paper, we discuss the theoretical specification of the AIDS and justify the claims in the previous paragraph. In Section II, the model is estimated on postwar British data and we use our results to test the homogeneity and symmetry restrictions. Our results are consistent with earlier findings in that both sets of restrictions are decisively rejected. We also find that imposition of homogeneity generates positive serial correlation in the errors of those equations which reject the restrictions most strongly; this suggests that the now standard rejection of homogeneity in demand analysis may be due to insufficient attention to the dynamic aspects of consumer behavior. Finally, in Section III, we offer a summary and conclusions. We believe that the results of this paper suggest that the AIDS is to be recommended as a vehicle for testing, extending, and improving conventional demand analysis. This does not imply that the system, particularly in its simple static form, is to be regarded as a fully satisfactory explanation of consumers' behavior. Indeed, by proposing a demand system which is superior to its predecessors, we hope to be able to reveal more clearly the problems and potential solutions associated with the usual approach.

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An Almost Ideal Demand System

The article outlines the production function approach to the estimation of the returns to R&D and then proceeds to discuss in turn two very difficult problems: the measurement of output in R&D intensive industries and the definition and measurement of the stock of R&D 'capital'. Multicollinearity and simultaneity are taken up in the next section and another section is devoted to estimation and inference problems arising more specifically in the R&D context. Several recent studies of returns to R&D are then surveyed, and the paper concludes with suggestions for ways of expanding the current data base in this field.

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Issues in assessing the contribution of research and development to productivity growth

This paper analyzes productivity growth in seventeen OECD countries over the period 1979-88. A nonparametric programming method (activity analysis) is used to compute Malmquist productivity indexes. These are decomposed into two component measures, namely, technical change and efficiency change. The authors find that U.S. productivity growth is slightly higher than average, all of which is due to technical change. Japan's productivity growth is the highest in the sample with almost half due to efficiency change. Copyright 1994 by American Economic Association.

Productivity growth, technical progress and efficiency change in industrial countries

The economic theory of index numbers and the measurement of input, output, and productivity

This paper analyzes productivity growth in 17 OECD countries over the period 1979-1988. A nonparametric programming method (activity analysis) is used to compute Malmquist productivity indexes. These are decomposed into two component measures, namely, technical change and efficiency change. We find that U.S. productivity growth is slightly higher than average, all of which is due to technical change. Japan's productivity growth is the highest in the sample, with almost half due to efficiency change. (JEL C43, D24) In this paper we apply recently developed

Productivity Growth, Technical Progress, and Efficiency Change in Industrialized Countries

Exact and superlative index numbers

The paper indicates how the Shephard duality theorem may be utilized in order to obtain a system of derived demand equations which are linear in the technological parameters, thus facilitating econometric estimation. This theorem states that technology may be equivalently represented by either a production function or a cost function, and a proof of the theorem is given. The chosen functional form is a quadratic form in the square roots of input prices and is a generalization of the Leontief cost function. The generalization has the property that it can attain any set of partial elasticities of substitution using a minimal number of parameters.

An Application of the Shephard Duality Theorem: A Generalized Leontief Production Function

Superlative Index Numbers and Consistency in Aggregation

This paper is the introduction to the forthcoming Macroeconomic Dynamics Special Issue on Measurement with Theory. The Guest Editors of the special issue are William A. Barnett, W. Erwin Diewert, Shigeru Iwata, and Arnold Zellner. The authors of this detailed introduction and commentary are William A. Barnett, W. Erwin Diewert, and Arnold Zellner. The included papers are part of a larger initiative to promote measurement with theory in economics.

Walter Diewert

Papers

The economic theory of index numbers and the measurement of input, output, and productivity

Exact and superlative index numbers

An Application of the Shephard Duality Theorem: A Generalized Leontief Production Function

Superlative Index Numbers and Consistency in Aggregation

Introduction to Measurement with Theory