Showing papers on "Factor price published in 1978"

Market Anticipations of Government Policies and the Price of Gold

Abstract: This paper is an analysis of the effects of anticipations of government sales policies on the real price of gold. Although the risk of a future government gold auction depresses the price, it also causes the price to rise in percentage terms faster than the real rate of interest and at an increasing rate. Even risk-neutral investors require this rate of return as inducement to hold gold in the face of the asymmetric risk of a price collapse. Announcements making a government auction more probable cause a sudden drop in the price. Government attempts to peg the price or to defend a price ceiling with sales from its stockpile must result eventually in a sudden attack by speculators.

Time on the Market and Selling Price

Abstract: This study is primarily an analysis of tradeoff between selling time and price, both on a nominal and real basis. Sellers are seen as desiring to maximize their discounted real selling price and trading off the nominal selling price with expected selling time. The time a property remains on the market is important, not only because of its reflection on price, but also because of its possible reflection on the issue of submarket equilibrium—an assumption in most urban price studies. The empirical results of this study shed light on how similar studies can easily misinterpret the implications of time on the market on price and how further work may be improved.

The Relationship Between Relative Prices and the General Price Level: A Suggested Interpretation

Abstract: In a thought-provoking paper in this Review, Daniel Vining and Thomas Elwertowski examine empirically the relationship between the variability of the rate of inflation in the general level of prices, and the variance of the rate of change in relative prices. They find a positive association between these two variances and interpret this finding as a contradiction to a modern stochastic version of the neoclassical model as presented by Robert Lucas (1973). They state: ". . . thus, in contrast to many of his other conclusions, Lucas' remark in an otherwise extremely controversial paper, namely 'that there is no reason to expect X to vary systematically with demand policies' (1976, p. 39), has gone utterly uncontested" (p. 706).' The implication is obviously that this type of model is inconsistent with the above mentioned finding. They go on to interpret their result in light of a recent paper by Robert Barro and interpret this paper as an ". . . effort to account for the observed dependence of heightened relative price change dispersion on general price change instability, relying upon a chain of causality running from general price level change instability to relative price change instability" (p. 707). They finally challenge empirical economists to discriminate between two hypotheses: ". . . i.e., to determine the direction of causality between individual price change dispersion and general price change instability" (p. 708). I claim and demonstrate in this note that: 1) If correctly interpreted the type of manymarkets stochastic model presented by Lucas is perfectly consistent with the finding that there is a positive association between individual price change dispersion and general price change dispersion. 2) It is wrong to interpret the Barro model as providing a rationale for "a chain of causality running from general price level change instability to relative price change instability" (Vining and Elwertowski, p. 707). It should rather be viewed as a conceptual framework in which both the variance of general price change and the variance of individual price change are influenced2 by some common exogenous variances like the variance of aggregate excess demand shocks and the variance of relative excess demand shocks.3 3) Within a framework in which both the variance of general price change and the variance of relative price change are determined endogenously the question regarding the direction of causality between those two variances becomes ambiguous. If for example both variances increase because the variance of the (exogenous) rate of change in nominal income increases, it does not follow logically that either the variance of general price change causes the variance of relative price change, or vice versa. However, the question raised by Vining and Elwertowski does make sense if interpreted as a question concerning the direction of causality between some attributes of aggregate variability and some attributes of relative variability. Such an interpretation is suggested later.

Production Flexibility and the Behaviour of the Competitive Firm under Price Uncertainty

Abstract: There have been numerous studies in the literature of the competitive firm under price uncertainty. Recently, Sandmo [18] and Batra and Ullah [2] have analysed the behaviour of an expected utility maximizing firm which chooses its output level subject to uncertainty about the price that will prevail for its product. Both studies represent increased price uncertainty by a multiplicative shift of the random variable coupled with a translation so as to preserve the mean, and they consider the effect on output of increased product price uncertainty. While Sandmo is unable to sign the effect, Batra and Ullah show that output declines if absolute risk aversion is declining. In both [18] and [2] it is assumed that all decisions must be made ex ante. Turnovsky [19] has extended the model to allow the firm to modify its initial decisions, at additional cost, after it learns the true selling price of its product. He compares initial production when price expectations are certain and when they are uncertain with the same expected value. Hartman ([10] and [12]) has investigated the firm's reactions to increased price uncertainty when the technology permits some ex-post flexibility in adjusting to the prices that are eventually realized. In the former paper Hartman uses a multiperiod model to analyse the effects of future product and factor price uncertainty on the rate of investment in a single capital stock, given that the firm encounters convex adjustment costs in changing the level of its stock. Qualitative results are derived from the hypothesis of constant returns to scale in production. This hypothesis is dropped in the two-period model in [12] which considers a single output, two factor technology.' Capital is a quasi fixed factor and must be chosen ex ante, while the other input, labour, may be chosen after prices become known with certainty. In both studies increased variability is represented by a mean preserving spread (see Rothschild and Stiglitz [16]), and it is generally assumed that the firm maximizes the expected value of profits. In [12], Hartman also compares the capital input given certain price expectations with that in a situation involving a " small" amount of uncertainty, assuming that the firm is averse to profit uncertainty. In this paper we modify and generalize the above analyses in three principal ways. First, we adopt the Rothschild-Stiglitz definition of increased uncertainty and show that the findings of both Sandmo and Batra and Ullaht must subsequently be altered. Unlike the other studies, we also investigate the effects of mean utility preserving spreads (see Diamond and Stiglitz [5]). These spreads generate some intuitively appealing comparative statics results. With the exception of a paper by Dhrymes [4] which employs the restrictive meanvariance framework, in other studies, including all of the above, the firm's ex-ante decision variable is a scalar, e.g. the level of production or the input of a quasi-fixed factor. Most of our qualitative results are similarly restricted to aggregative models. However, for the

Do Multinational Firms Adapt Factor Proportions to Relative Factor Prices

Abstract: It has been alleged that multinational firms fail to adapt their methods of production to take advantage of the abundance and low price of labor in less developed countries and therefore contribute to the unemployment problems of these countries. This paper asks two questions: do multi-national firms adapt to labor cost differences by using more labor-intensive methods of production in LDC's than in developed countries and do multinational firms' affiliates in LDC's use more capital-intensive methods than locally-owned firms? We concluded that both U.S.-based and Swedish-based firms do adapt to differences in labor cost, using the most capital-intensive methods of production at home and the least capital-intensive methods in low-wage countries. Among host countries, the higher the labor cost, the higher the capital intensity of production for manufacturing as a whole, within individual industries, and within individual companies. When we attempted to separate the capital-intensity differences into choice of technology and method of operation within a technology we found that firms appeared to choose capital-intensive technologies in LDC's but then responded to low wage levels there by substituting labor for capital within the technology. Similarly, U.S. affiliates appeared to use technologies similar to those of locally-owned firms but to operate in a more capital-intensive manner mainly because they faced higher labor costs.

Price Controls, Binding Constraints, and Intertemporal Economic Decision Making

Abstract: A constraint on a decision variable is normally thought to be binding only if it prevents that variable from taking on its unrestricted current equilibrium value. This paper establishes that this is not true when decisions are intertemporally related. In such a decision-making environment, imposing a price ceiling, for example, which is greater than the current equilibrium price can be binding in that it will alter current price. Likewise, the removal of a price ceiling which exceeds current price can result in a change in that price. Among other things, this result casts doubt on the widespread view that price ceilings on petroleum products are not binding because current prices are less than the ceilings.

The price of life.

Abstract: It is often said that human life is priceless. No amount of money or other goods equals the value of a human life. The only justification for not preventing the loss of a human life when one can do so is that it would result in the loss of even more lives. In short, only human lives can be balanced against human lives. The philosophical locus classicus for this view is Immanuel Kant's claim that human beings have a dignity but not a price. By 'price' he did not mean a merely monetary value but an equivalence. "Whatever has a price can be replaced by something else as its equivalent."'1 Thus, the claim that human lives are priceless is not merely that no monetary value can ethically be placed upon them, but that no exchange value of other goods can be placed upon them. A distinct but correlated claim is that all human lives are of equal value. The pricelessness of human life does not imply that all lives are of equal value. Some lives might be more priceless than others just as some infinities are greater than others. However, it does make plausible their having equal value. If no price or value can be assigned to lives, there is no obvious basis for comparative judgments of their value, and they should be treated equally. Contrarily, if human lives do have a price, it is a priori unlikely that all have the same value or price. The issues of whether human lives have a price, and if so, what it is, constantly recur in bioethics and social policy generally. The distinction between ordinary and extraordinary lifesaving treatment

The 1973 Food Price Inflation

Abstract: This study analyzes the major causes of the food price inflation of 1973. In the approximate order of their importance, those causes were found to be domestic monetary policy, government acreage restrictions, the Soviet grain deal, world economic conditions, devaluation of the dollar, and price freeze II. Econometric models of the livestock and feed grains and meal economies were used to decompose the price increase into the various causes given above. The study also details and analyzes events and policy actions taken during the 1971–74 period.

Aspects of Unilateral Trade Policy and Factor Adjustment Costs

Abstract: OVER the past decade, the post-war United States position in favor of free trade has been strongly attacked by those who have invested in and are employed in industries facing significant competition from imports. Since factors of production are temporarily tied to a particular industry, all factors in contracting industries experience economic losses of a short-run nature. This paper considers to what extent these short-term losses alter the welfare evaluation of free trade policies. A second intent, based on the analytical framework developed to resolve the first point, is to determine when a tariff reduction may be preferable to tariff removal and how such tariff reductions may be effectively carried out over time. In the literature of trade policy, it has been shown that in a two-good general equilibrium model under the assumption that factors of production are immobile, the gains from free trade will be reduced but remain positive if no distortions exist (Haberler, 1950; Johnson, 1965). More recently, studies have focused on the short-run distributional effects of changing international prices. Capital has been postulated to be immobile between the two industries and relative factor prices perfectly flexible (Mayer, 1974; Mussa, 1974). In this paper the analysis is based upon the situation where factor-price rigidities exist in addition to factor immobility. Under these circumstances changes in international prices result in unemployment. The economy is moved inside its long-run production possibilities frontier, and any welfare assessment of a free trade policy must allow for the second-best effect of this factor-market distortion. Because the short-run effect may be negative, the question arises whether the long-run welfare gain for a small country offsets this loss.' This study treats imports and domestic competing goods as imperfect substitutes, and allows for the effects of short-run output price rigidities. Limitations of the analysis are that only unilateral tariff reductions are dealt with empirically, and terms-of-trade effects are ignored.2 The model is used to evaluate the welfare cost of current tariff barriers for five disaggregated industries: industrial chemicals, iron and steel, machine tools, electrical machinery, and motor vehicles. One issue that falls out of this approach is whether an intermediate position between free trade and the current level of restrictions is preferable, given the existence of factor-market distortions. It is shown empirically that complete tariff removal generally will not be optimal in terms of economic efficiency and that phased reductions of tariffs over time will be preferable to a single tariff cut. Section I is concerned with the determination of benefits and social costs from tariff removal. Since United States trade policy often is determined in the context of unilateral policy changes affecting a single disaggregated industry, the empirical calculations presented in

Labor Market Pressures and Wage Determination in Less Developed Economies: The Case of Kenya

Abstract: In recent years, economic development literature has focused attention on the problems created by high rates of population growth and widening disparities in income distribution. Rural-urban migration has been, in part, a response to pressure on land in rural areas as well as to the high wages paid by a relatively capital-intensive modern sector in the cities and towns. However, the labor-absorptive capacity of this sector has been very low, with the result that the aspirations of some of the migrants have not been fulfilled. Many find employment in the labor-intensive, low-paying informal sector which has sprung up to serve the needs of the urban poor for services and low-cost manufactured goods.1 The unemployment problem in less developed countries (LDCs) is said to be aggravated by the "wrong" factor price ratio between capital and labor, partly because of institutionally determined modern sector wages and partly because of an artificially low price of capital attributable to an overvalued exchange rate and various investment incentives. This

Factor Demand in the Multi-Product Firm

Abstract: In this paper the comparative-static behavior of the multi-product firm is examined and shown to be sharply different in certain circumstances from that of the single-product firm in received theory. The theory of the multiproduct firm has been largely neglected, probably because most formulations of its problem have led to the conclusion that, aside from the problem of interdependent demand and joint production, it is a straightforward extension of the theory of the single-product firm (e.g., [3, 319-32]). Ralph W. Pfouts [7] has shown, though, that if the multi-product firm is able to switch some of its fixed factors from one product line to another, then when one or more of the fixed factors is fully employed, the firm can no longer be viewed as a collection of single-product firms. It is confronted with the unique problem of rationing some of its fixed factors among the many product lines. This distinctive class of quasi-variable factors leads, not only to complications of the usual multi-product firm's equilibrium conditions for cost minimization [7] and for profit maximization [6], but also to somewhat surprising comparativestatic properties of the equilibria.1 In particular, for a given vector of output levels, the cost-minimizing demand for a factor of production summed over all product lines will be inversely related to the factor price; however, the demand for the factor in an individual product line may not be. That is to say, the direct substitution effect of the change in price may not be negative for a factor in a single product line, although summed over all lines, it will be. Moreover, while the effect on the cost-minimizing demand for the ith factor of a change in the price of the jth factor equals in aggregate the effect on the cost-minimizing demand for the jth factor of a change in the price of the ith factor, such is not

Do Multinational Firms Adapt Factor Proportions To Relative Factor Prices

Abstract: It has been alleged that multinational firms fail to adapt their methods of production to take advantage of the abundance and low price of labor in less developed countries and therefore contribute to the unemployment problems of these countries. This paper asks two questions: do multi-national firms adapt to labor cost differences by using more labor-intensive methods of production in LDC's than in developed countries and do multinational firms' affiliates in LDC's use more capital-intensive methods than locally-owned firms? We concluded that both U.S.-based and Swedish-based firms do adapt to differences in labor cost, using the most capital-intensive methods of production at home and the least capital-intensive methods in low-wage countries. Among host countries, the higher the labor cost, the higher the capital intensity of production for manufacturing as a whole, within individual industries, and within individual companies. When we attempted to separate the capital-intensity differences into choice of technology and method of operation within a technology we found that firms appeared to choose capital-intensive technologies in LDC's but then responded to low wage levels there by substituting labor for capital within the technology. Similarly, U.S. affiliates appeared to use technologies similar to those of locally-owned firms but to operate in a more capital-intensive manner mainly because they faced higher labor costs.

Rigid Wage, Factor Immobility and Immiserizing Growth*

Abstract: In the theory of trade and growth, Bhagwati made an interesting contribution by demonstrating the proposition that growth can be welfare reducing even at constant terms of trade, whenever distortions obtain in an economic system. Batra-Scully strengthened the Bhagwati thesis and derived the conditions for growth to be immiserizing at improved terms of trade in the presence of a wage differential. In the present analysis, we show that economic expansion in a country which is characterized by factor immobility and/or factor price rigidity may not reduce the country's real income at constant or improved terms of trade. Specifically, the Bhagwati theorem, and its stronger version proposed by Batra-Scully, hold for an economy with a rigidity in factor price whether or not accompanied by factor immobility. However, growth will not lower welfare at constant or improved terms of trade if factor immobility is the only imperfection existing in the factor market.

Car Market Price Competition in the Mid 1970s

Abstract: Rapid inflation, the severe reduction in demand for cars and the resultant over‐capacity, reestablished the importance of price as a competitive weapon in the car market between late 1973 and 1977. In times of steady economic growth the over‐whelming influence of changes in per capita income on car demand tends to relegate the price variable to a secondary position, and often it is almost totally discounted as a major causative variable. However, in a number of ways the state of the market in the mid 1970s has shown the continuing importance of relative prices: the pricing of imports, exports and price competition by domestic manufacturers all being geared to improving a manufacturer's market penetration. Consequently, the pricing decision remains as one of the most important features of competitive strategy and as a major factor in managerial decision making.

Homotheticity and the Relationship between Plant Output and Factor Prices under Perfect Competition

Abstract: Until relatively recently, economists have made little progress in establishing specific propositions about the relationship between factor prices and firm output.' In general, it is not possible to predict the scale or factor demand effects of a change in factor prices. However, in recent years the analysis of these issues has been considerably advanced; for example, see Truett and Roberts (1973) and Silberberg (1974). Both of these articles establish a special case result on scale which does not seem to have become generally appreciated. Specifically, for identical firms in a perfectly competitive industry, if the production function is homothetic then a firm's long-run output is independent of factor prices. This striking result has previously been buried in more general analysis, resulting in unnecessarily complicated proofs. One of our principal aims is to provide a simple direct proof using the properties of a cost function dual to a homothetic production function. Our analysis also brings to light several other implications of homotheticity. For example, the ratio of the long-run average costs of producing at any two output rates does not depend on factor prices. This and other results are presented in the next section. In the third section we

On the Factor-Price Frontier in the Pure Theory of International Trade

Abstract: The purpose of this paper is to demonstrate that the analysis of the effect of commodity price change on the prices of factors of production can be conducted effectively by a technique based upon the Factor-Price Frontier (FPF). Suprisingly enough the FPF has so far been paid little attention, if not ignored, in the pure theory of international trade. Instead the Edgeworth-Bowley box diagram and / or the so-called Samuelson-Johnson diagram have been usually and extensively used.2 What has been said in terms of these diagrams on the commodity-prices / factor-prices relationships can, however, be derived and proved more easily and clearly in terms of the FPF. In Section 11 the FPF will be derived diagramatically from the familiar isoquant. Sections 111 and IV illustrate the effectiveness of the FPF in dealing with the factor price changes relative to commodity price changes, applying it to proving a few fundamental theorems, i.e., the Stopler-Samuelson theorem in a standard two-commodity, two-factor case, and the Haberler-Jones theorem3 in a two-commodity, three-factor case. Section V analyses in terms of the FPF the effects of factor price differentials.

On Estimating the Time Structure of Capital-Labor Substitution in the Manufacturing Sector: A Model Applied to 1949-72 Canadian Data

Abstract: Current estimates of the elasticity of substitution in the Canadian total manufacturing sector are based either on direct estimation of the parameters of the CES production function using a non-linear estimation technique [2; 27] or on indirect estimation of the same parameters using the profit-maximizing condition that labor is employed up to the point where its marginal revenue product is equal to the wage rate [12; 13; 14] or the profit-maximizing condition that the marginal revenue product of capital must equal the implicit rental price of capital [15]. Unfortunately, none of these methods permits one to focus on the time structure of the substitution process. Since both employment and investment respond with a lag to changes in market conditions [10; 16; 20] it follows that it takes time for the capital-labor ratio to adjust to changes in the factor price ratio. One attempt to estimate the time structure of the elasticity of substitution was made by Ferguson and Moroney [6; 18] in their work on the elasticity of substitution, technological progress and factor shares using American data. In their analysis the current capital-labor ratio is a function of the current factor price ratio, time, and the capital-labor ratio lagged one year [6, 315; 18, 216]. Unfortunately, their model fails to allow for two possibilities. First, the exponentially declining distributed lag structure used in their model may not be the best lag structure for estimating the lagged response of the capitallabor ratio to a change in the factor price ratio. Second, they do not incorpo-

Some complications in the measurement of environmental control impacts: A case study of water pollution controls☆

Abstract: This paper examines several complications in the measurement of the impact of government regulations on industry. It focuses on problems of water pollution control, but its lessons apply to almost any exogenous and discontinuous change in factor costs whether regulation induced or not. Among the problems addressed are: estimation of industry cost curves; economic criteria for identifying the technical alternatives to be included in engineering studies of regulatory impact; choice of minimum cost abatement methods; sensitivity of findings to factor price changes; managerial criteria for selection of control methods; intra-industry disaggregation of impacts; dynamic economic process of adjustment to controls. The methods demonstrated are microanalytical in nature. This paper does not examine the larger social questions regarding the effectiveness of regulation.

New product price controls in France

Abstract: Price controls on existing products frequently incite firms to drop low-margin products and to re-introduce them later with a higher margin under a new name. This creates the need for price regulations dealing specifically with new products. The article describes the development of new product price controls in the context of the overall French price control system. An effort is made to assess and to explain the actual effectiveness of the new product price controls.

Induced Adjustment and the Role of Agriculture in Economic Development: A Case Study of Egypt and Syria

Abstract: Publisher Summary The initial economic development of United Kingdom, the United States, and Japan began with the development of agriculture, which in due course provided the marketable agricultural surplus of raw materials for their industry and of food for their industrial workers, in addition to the purchasing power to their agriculturists for buying the industrial goods produced The realization of this historical role of agriculture in the process of modern economic development has not only made the development of agriculture a respectable initial strategy for developing an economy but has also made the reasons for the successful development of agriculture a matter of serious consideration This chapter explores the extent to which the experiences of the United States and Japan have been duplicated in the underdeveloped world The chapter presents a study of two countries in the Middle East, Egypt, and Syria, the former with a relative scarcity of land similar to Japan's and the latter with a relative abundance of land similar to the United States The idea of induced innovation is essentially an extension of the idea of factor substitution in response to changing factor prices (scarcity), when such a change does not only cause factor substitution given the production function; however, it also determines the choice of a new production function