Showing papers in "Economica in 1974"

Multinational Firms, Competition, and Productivity in Host-Country Markets

Abstract: This paper tests for certain benefits of foreign direct investment in the manufacturing sectors of two leading host countries-Canada and Australia. A quest for evidence on the effects of the multinational corporation needs little defence at a time when host and source countries alike incline towards restricting its activities. Economic theory tells us that intramarginal2 gains from foreign investment take diverse forms. An evident and tangible gain to the host government stems from the corporate income tax collected from subsidiaries (net of the incremental cost of public services supplied to them). Other benefits, conjectural and elusive but possibly large, lie in the effects of direct investment on the value productivity of resources owned by the host economy (Macdougall, 1960; Corden, 1967; Caves, 1971). The host nation's private sector does not benefit directly because the foreign subsidiary is efficient, or brings to its shores skilled entrepreneurship or productive knowledge. Rather its gains depend on spill-overs of productivity that occur when the multinational corporation cannot capture all quasi-rents due to its productive activities, or to the removal of distortions by the subsidiary's competitive pressure. These potential benefits can be divided into three classes.

Trade with Non-traded Goods: The Anatomy of Inter-connected Markets

Abstract: in which each of two countries produces two tradeable commodities, with the international terms of trade representing the single relative price in the system. (I am ignoring the underlying factor markets. The entire analysis of this paper presupposes some standard set of assumptions, such as those of the Heckscher-Ohlin model, that guarantees bowed-out transformation schedules.) Although it is not difficult to set up more complex trade models with many commodities (and perhaps many countries), it is quite another thing to achieve readily understandable stability conditions and comparative statics results. In this paper I develop a model that is only slightly more complex than the standard two-commodity model. It is a three-commodity model, with appropriate simplifying assumptions made so that the analytical building blocks familiar from the standard two-by-two model are allowed easy visibility. The third commodity represents a category of goods that is prevented by high transport costs from entering into international trade. With this addition the model becomes complete in the sense of covering all categories of commodities according to their "tradedness". A commodity either represents an exportable, an importable or neither. Non-traded commodities must have their markets cleared locally, and in this respect differ fundamentally from traded commodities, for which local excess demands or supplies can be accommodated in world markets. The most general treatment of a trade model with non-traded goods in the literature has been provided by Ian McDougall (1970), based in part on earlier work by Pearce (1961), McDougall (1965) and Komiya (1967). The model in the present paper is considerably more simple by virtue of the assumption that residents in each country have no effective demand for the commodity which that country exports and produce no commodity similar to the one being imported. Such an assumption may indeed have some relevance to those underdeveloped countries for which such a pattern of specialization in consumption and production

Relative Prices, Growth and Trade in a Simple Ricardian System

Abstract: The Ricardian system appears to have fascinated every generation of economists since its original formulation. Ours is no exception. Knight (1935), Stigler (1952), Kaldor (1956) and Samuelson (1959) to mention only some of the most eminent theorists of our time, have all devoted papers to examining and appraising the nature of Ricardo's unique contribution to economic analysis. Piero Sraffa (1951), in addition to his monument of scholarship in a complete edition of Ricardo's works and correspondence, has also given in his Introduction a penetrating interpretation of the evolution of Ricardo's thought. Pasinetti (1960) has presented a mathematical formulation of the Ricardian system in which it appears as a simple but elegant and determinate two-sector general equilibrium growth model. The first section of this paper gives an elementary diagrammatic solution of the Ricardo-Pasinetti model, in terms of demand and supply, which serves as the basis for the analysis of the rest of the paper. The second section examines the role of demand in the model and the effects of technological changes on relative prices and the distribution of income. The final section extends the model to consider international trade.

Discount rates and public investments : a post-scriptum

Abstract: 1. Shortly after the publication of the paper by Sandmo and myself on "Discount Rates for Public Investment in Closed and Open Economies" (Economica, November 1971), my attention has been drawn to a manuscript on the same subject by Mr. John Kay entitled "Social Discount Rates".2 Kay reproduces and extends arguments introduced by K. J. Arrow in a paper that Sandmo and I had unfortunately overlooked ("Discounting and Public Investment Criteria", in Water Research, Kneese and Smith, Editors, Baltimore, Resources for the Future, 1966). The conclusions reached by Arrow and Kay seem to be at variance with those reached by Sandmo and myself. For the case of a closed economy, we "conclude that the public sector's discount rate should be a weighted average of the rate facing consumers and the tax-distorted rate used by firms", (loc. cit. p. 401). Arrow, on the other hand, argues "that the optimal policy for taxation and public capital formation will be that which equates the marginal productivity of public investment to the consumption rate of interest" (loc. cit. p. 26). The divergence of conclusions has both logical and practical relevance.3 Since both analyses are formally correct (at least to my satisfaction), the divergence in the conclusions stems from diverging assumptions. The purpose of this post-scriptum is to acquaint those economists who read Economica, but do not keep up with water research, with Arrow's line of analysis; to explain where the divergences between the two approaches originate and how they can be reconciled; and to comment briefly on the policy recommendations implied by this comparison. This exercise may also serve as a useful illustration of some pitfalls connected with alternative approaches to intertemporal allocation problems. My purpose requires an extension of the SandmoDreze analysis to n periods; the technical development of this extension is

Advertising Policy and Returns to Scale in Markets where Information is Passed Between Individuals

Abstract: The purpose of this paper is to develop a model concerning an aspect of the theory of advertising which has received relatively little formal analysis in the literature. The model postulates an approach that an advertiser who wishes to introduce certain products or services might take in order to determine an optimal strategy. It also suggests a mechanism which may help in understanding why it is that apparently similar organizations which continually introduce apparently indistinguishable variants of a product (cigarettes for example) find that a few are huge successes whilst the majority fail and why repeated

Relative Wages and Trade Unions in the United Kingdom

Abstract: British economists in the last decade or so have concentrated their efforts on the part played by unions in wage inflation. This paper is addressed to a somewhat different question: by how much have trade unions in Britain raised the pay of unionized manual workers relative to the pay of non-unionized manual workers? The derived estimates pertain not to a single occupation or industry, but are an economy-wide average and so, no doubt, conceal some important differences within particular sectors. Nevertheless an examination of the British experience affords a valuable opportunity to consider whether the institutional setting of collective bargaining acts as a neutral factor in determining the influence of unions on relative wages. Many observers have drawn attention to the existence in the high employment postwar British economy of two systems of industrial relations; in its Report, the Royal Commission on Trade Unions and Employers' Associations (1968) presents a cogent, if rather strong, summary description of the characterization of the two systems. On the one hand, there are those industries where average hourly earnings (net of overtime pay) do not differ substantially from the wage rates negotiated between representatives of the employers and of the unions at the industry level. On the other hand, there are those industries (the large engineering sector being the standard example) in which actual hourly earnings are considerably in excess of the industry-wide wage rate agreements and it is in these industries that, as far as the pay of manual workers is concerned, bargaining at the plant or firm level takes on paramount importance. These differences in the industrial relations systems may imply corresponding differences in the opportunities available to unions to secure an hourly earnings differential for their members vis-a-vis non-union workers. To investigate this possibility, a framework for measuring the relative wage effect of trade unions is presented in Section I. There follows a brief description of the British industrial relations systems. Section III contains estimates of the effect of unions on relative wages using industry crosssection data. A summary of these results is offered in the concluding section.

The Cyclical Pattern of Unemployment and Wage Inflation

Abstract: The seminal study by Phillips (1958) revealed two empirical regularities with regard to British cycles in unemployment and wage inflation prior to the Second World War. These same regularities appear also to characterize the experience of European and North American countries during that period. First, the average relation between unemployment and inflation is inverse, convex, and has a positive intercept on the unemployment axis. In other words, on average, the lower the unemployment rate the higher the rate of wage inflation, the lower the unemployment rate the greater the increase in the inflation rate associated with a further decrease in the unemployment rate, and at a zero rate of wage inflation the unemployment rate is significantly positive-almost 2- per cent in Phillips' study. Secondly, when wage inflation begins to accelerate, typically unemployment briefly increases before beginning to decline. Analogously, when inflation begins to decelerate, typically unemployment briefly decreases before beginning to rise. Thus, the pattern of the typical cycle traces out a counterclockwise loop around the average relation between unemployment and inflation. A given rate of inflation is associated with a higher level of unemployment when inflation is accelerating than when inflation is decelerating. Figure 1 illustrates the typical cyclical pattern prior to the Second World War. Since the war the cyclical pattern of unemployment and wage inflation seems to have changed. Specifically, although the average relation between unemployment and inflation seems qualitatively unaltered, if statistically less pronounced, the second of the two regularities discussed above seems to be reversing. In recent cycles, when inflation has accelerated, often unemployment has initially decreased. However, in the final stages of accelerating inflation, unemployment has increased. This transitional period of persistently rising inflation and rising unemployment has become known popularly as "stagflation". Analogously, when inflation has decelerated, unemployment has initially increased. However, in the final stages of decelerating inflation, unemployment has decreased. Thus, since the Second World War, the pattern of the typical cycle has shown a tendency to trace a clockwise, rather than counterclockwise, loop. A given rate of inflation now appears

Wage Rate Changes and the Excess Demand for Labour: An Alternative Formulation

Abstract: R. G. Lipsey's (1960) classic rationalization of the Phillips curve depends, as is well known, on the existence of two stable functional relationships, which may be expressed as V= F{(D-S)/S} and (D S)/S= G(U), with F'>0 and G'<0. (Here W denotes the rate of change in the wage rate, D and S are quantities of labour demanded and supplied, and U is the unemployment rate.) In the years since they were advanced Lipsey's hypotheses regarding the function G have been criticized by several writers. In particular, Corry and Laidler (1967) argued that G' might well be positive for some values of U, while Phelps (1968), in a now famous paper, questioned the existence of any unique relationship between U and excess demand. As a result of these criticisms it would appear that the unemployment rate cannot be accepted as a satisfactory "proxy" for excess demand. Some analysts have proposed the use of vacancy statistics in conjunction with those on unemployment, for example, Dicks-Mireaux and Dow (1959) and Hansen (1970). But while in principle the joint use of unemployment and vacancy figures might provide appropriate measures of excess demand, in practice vacancy statistics are of little assistance, being unavailable in many countries and only tenuously related to the appropriate theoretical concept in others. A discussion of some of the issues, in the American context, is provided by Dunlop (1966). An additional objection to unemployment proxies, used with or without vacancy data, arises in disaggregated studies carried out at the level of specific industries: the notion of industry-level unemployment rates is inherently unsatisfactory, as it suggests almost complete labour force immobility. The absence of direct measures or adequate indicators of excess demand does not imply, however, that there is no satisfactory procedure for statistical estimation of a wage adjustment equation based on the function F.2 There is, on the contrary, a straightforward approach that would appear to merit serious consideration. The purpose of this paper

A Note on the Economics of Public Intermediate Inputs

Abstract: The theoretical literature on pure public goods is primarily devoted to an analysis of public goods entering consumption. However, many pure public goods such as basic research, pollution, non-congested roads, flood control and farm weather reports enter market production activity. The few theoretical papers written on public intermediate inputs have been concerned with developing what the authors call the Samuelson efficiency conditions, parallel to the consumption conditions (Sandmo, 1972; Kaizuka, 1965; Thompson, 1968). This paper examines conceptual problems that arise when one has to specify production functions having public goods as an input. First, of particular interest is under what specifications the Samuelson conditions are meaningful or even valid. Secondly, I examine problems that arise when pure public goods enter production functions as unpriced inputs. For example, when unpriced private goods enter production functions of certain specifications they earn a rent that accrues to entrepreneurs as profits. These profits may attract entrants into the industry to dissipate the rents. For private goods this dissipation causes factor usage distortions as analysed extensively in the literature (Worcester, 1969; Meade, 1955). The question is whether rent dissipation with unpriced pure public intermediate inputs causes factor usage distortions. Throughout this paper I assume that firms cannot be excluded from utilizing the public intermediate input. With non-exclusion government support in provision of the intermediate input is necessary due to the free rider problem. The government currently supports the production of the input; and we assume that at present it makes it available at zero cost to all firms who choose to use it.

The Micro Theory of the Phillips Curve Reconsidered: A Reply to Holmes and Smyth

Abstract: ... that the familiar model of demand and supply for labour does not provide a functional relationship between the operational concept of unemployment and excess demand and supply. Hence a relation between the rate of change of money wages and the rate of unemployment cannot be derived from this model and the Lipsey type of theoretical justification for the Phillips curve phenomena is not valid.

The Optimal Balance between Economies of Scale and Variety of Products: An Illustrative Model

Abstract: In conditions of monopolistic competition there is a number of independent producers each producing its own particular brand or quality of a class of products which, while they are not exactly identical, are nevertheless partial substitutes for each other. A well-known problem in the economics of welfare then arises which can be expressed by asking the following two questions. First, is each producer producing the optimal output of his particular brand? Second, are the best number and assortment of brands being produced, or should there be more or less variety of products to meet the consumers' needs? The answer to the first of these two questions is reasonably straightforward. Since each producer will be faced with a less than infinitely elastic demand curve for his particular brand, his selling price will be above his marginal revenue and, therefore, above his marginal cost. He must produce more if he is to equate marginal cost to selling price. This proposition is, of course, subject to all the familiar limitations of the "second best". In particular, in a world of monopolistic competition the proposition that marginal costs should be equated to selling prices will hold good only if it is applied simultaneously in all lines of production; and if it is so applied and if we start from a position of full employment, it will clearly be impossible for all producers to expand their outputs simultaneously. What will happen as every producer simultaneously attempts to expand output will be a bidding up of the prices of the variable factors so that relationships between marginal costs and prices will be altered in the various lines of production. As a result some outputs will be increased and others decreased. Equilibrium will be reached only when outputs have been so adjusted that in each line of production marginal cost equals selling price. But what about the second question? Will the number and variety of products being produced be optimal? The marginal conditions for optimality may be satisfied; but is the structure of production optimal? The answer to this question is not so straightforward or familiar.

Flexibility and Consistency in Project Evaluation

Abstract: Third World, and the respect in which each of the distinguished authors is justly held, it seems to me that these basic differences in method, possibly also in conception, of cost-benefit analysis should be made as explicit as possible. It should be noted that apart from the controversial methodological issues raised in this paper, Guidelines offers a more thorough treatment of cost-benefit techniques applied to poor countries than can be found today in any other volume or monograph. Though perhaps rather less accessible to the intelligent layman than the authors imagine, it is for the most part judiciously written and should be regarded as an essential work of reference for all students interested in project selection for economically backward countries. The lesser question, discussed in Section I, concerns the treatment of political and administrative constraints in the calculation of those "national parameters" that are derived wholly from economic principles. The more important question, treated in Section II, concerns the role, if any, in cost-benefit analysis of those "national parameters" that do not derive from familiar economic principles but are in effect politically determined.