Showing papers on "Factor price published in 1997"

Convergence in the age of mass migration

Abstract: Between 1870 and 1913 economic convergence among present OECD members (or an even wider sample of countries) was dramatic, about as dramatic as it has been over the past century and a half. What were the sources of the convergence? One prime candidate is mass migration. This paper offers some estimates which suggest that migration could account for very large shares of the convergence in labour productivity and real wages, though a much smaller share in GDP per capita. One might conclude, therefore, that virtual cessation of convergence in the interwar period could be partially explained by the imposition of quotas and other barriers to migration.The exportation of labourers and capital from old to new countries, from a place where their productive power is less to a place where it is greater, increases by so much the aggregate produce of wealth of the old and the new country.… Colonization, in the present state of the world, is the best affair of business, in which the capital of an old and wealthy country can engage.–John Stuart MillMill (1929 [1848])It must be emphasized that without the change in the proportions of the factors of production that occurs as a result of migration or population growth, differences in factor prices in various countries will persist, and the factors of production of the world as a whole will not be used to their best advantage.–Eli F. HeckscherFlam and Flanders (1991, 59). Heckscher understood that with impediments to trade or with specialization outside cones of diversification (a failure of ‘harmonic equilibrium’, in his words), factor price convergence would be incomplete and factor migration necessary to obtain factor price equalization.

Shifts in U.S. Relative Wages: The Role of Trade, Technology and Factor Endowments

Abstract: This paper investigates three hypotheses to account for the observed shifts in U.S. relative wages of less educated compared to more educated workers between 1967 and 1992: increased import competition, changes in the relative supplies of labor of different education levels and changes in technology. Our analysis relies on a basic relation of the standard general equilibrium trade model that relates changes in product prices to factor price changes and factor shares, and information about changes in the composition of output, trade, within-industry factor use and factor supplies. We conclude that the relative increase in the supply of well educated labor from 1967-1973 was the dominant force that narrowed the wage gap among workers of different education levels. The gap continued to narrow during the rest of the 1970s, but our results are not clear-cut enough to conclude that the continued increase in the rela- tive supply of more educated workers was the main factor shaping relative From 1980-1993, the wage gap between these workers widened sharply despite the continued relative increase in the supply of more educated workers. Increased import competition cannot account for the rise in wage inequality among these groups but it could have contributed to the decline in wages for the least educated. Instead, support is found for technical progress that is saving of less educated labor and more rapid in some manufacturing sectors using highly educated labor as the main force in widening the wage gaps these groups. Last, we use the Deardorff-Staiger model which allows changes in the factor content of trade to reveal the effects of trade on relative factor prices. Our tests show increased import competition from 1977 to 1987 was not the dominant force in widening the wage gap between more educated and less educated labor between those years.

The demand for transportation fuels: imperfect price-reversibility?

Abstract: This paper examines the price-reversibility of fuel demand for road transport. The analysis is based on an econometric model which utilizes price-decomposition techniques to measure separately the effects of different types of price increases and decreases. The methods proposed allow empirical testing of irreversibility and certain forms of hysteresis in demand relationships. The results lend strong support to the notion that consumers do not necessarily respond in the same fashion to rising and falling prices, nor equivalently to sudden and substantial price rises as to minor price fluctuations: demand is not necessarily reversible to price changes. This finding severely challenges the equilibrium basis of the traditional, reversible demand model. In the particular example used, the results indicate that consumers have reacted more strongly to the price rises of the seventies, than to other price rises, and that the resulting fuel reductions will not be totally reversed as prices return to lower levels. The results also show that, if irreversibilities do exist, the use of reversible, symmetric models will produce biased elasticity estimates, not only for prices, but for other variables as well. The methods used in this analysis should be applicable to more detailed analysis of travel behaviour, where asymmetry of response or persistence of effect may be relevant. The existence of price asymmetries will have important implications for fuel use in transport, as well as for traffic growth, and particularly for evaluating the impact of price-related transport policy. It will also affect the possibility of estimating price elasticities and forecasting demand on the basis of historic data.

"The Bigger They Are, The Harder They Fall": How Price Differences Across U.S. Cities Are Arbitraged

Abstract: Recent empirical work has made headway in exploring the non-linear dynamics of deviations from the law of one price and" purchasing power parity that are apt to arise from transaction costs. However, there are two important facets of this work that need improvement. First, the choice of empirical specification is arbitrary. Second, the data used are typically composite price indices which are subject to potentially serious aggregation biases. This paper examines the evidence for transport-cost-induced nonlinear price behavior within the U.S. We address both of the above shortcomings. First, we use a simple continuous-time model to inform the choice of empirical specification. The model indicates that the behavior of deviations from price parity depends on the relative importance of fixed and variable transport costs. Second, we employ data on disaggregated commodity prices, yielding a pure' measure of the deviations from price parity. We find strong evidence of nonlinear reversion in these deviations. The nature of this reversion suggests that fixed costs of transportation are integral to an understanding of law-of-one-price deviations.

Shifts in US Relative Wages: The Role of Trade, Technology and Factor Endowments

Abstract: This paper investigates three hypotheses to account for the observed shifts in US relative wages of less educated workers compared to more educated workers from 1967–92: (i) increased import competition; (ii) changes in the relative supplies of labour of different educational levels; and (iii) changes in technology. Our analysis relies on a basic relationship of the standard general equilibrium trade model, that relates changes in product prices to factor price changes and factor shares, together with information about changes in the composition of output, trade, within-industry factor use and factor supplies. We find support for the hypothesis that the relative increase in the supply of well-educated labour was the dominant economic force that narrowed the wage gap in the late 1960s and early 1970s. Our results also indicate that technical progress rather than increased import competition was the dominant force in the widening of the wage gap among the major education groups after 1980.

Factor Prices and the Factor Content of Trade Revisited: What's the Use?

Abstract: This paper examines the usefulness of a result of Deardorff and Staiger (1988), who showed that the factor content of trade can be interpreted under certain assumptions as indicating the nature of the factor price adjustments that can, in a specified sense, be attributed to that trade This paper elaborates on the sense in which this result says anything about the factor market effects of trade It also examines several of the assumptions that were used by Deardorff and Staiger to determine whether they can be relaxed These include the assumption, used for only one of Deardorff and Staiger's several results, of Cobb-Douglas technology, which is shown here to be easily extended to Constant Elasticity of Substitution Also examined is the assumption of nonspecialization, or that all imported goods are produced or producable in the domestic economy With Cobb-Douglas technology that assumption is shown not to be needed With more general technology, however, the presence of non-competing imports requires a reinterpretation of the factor content of trade Whereas without noncompeting imports, trade itself is analogous, in terms of its effects on factor markets, to a change in factor endowments equal to the factor content of trade, with noncompeting imports trade has an additional effect analogous to a Hicks-neutral technological improvement enabling those noncompeting imports to be produced competitively

Price Caps, Rate-of-Return Regulation, and the Cost of Capital

Abstract: This note compares the effects of price cap and rate-of-return regulation on the risk borne by regulated utilities. It present evidence that price cap regulation subjects firms to greater risks and therefore raises their cost of capital. This result has one clear implication: firms regulated by price caps must be permitted to earn higher returns. If they are not, they will be unable to attract new investment capital and the quality of their service will decline.

Does environmental regulation matter? Determinants of the location of new manufacturing plants in India in 1994

Abstract: The costs attributable to complying with environmental regulation are not as important as other determinants of where Indian businesses locate new plants. The level of existing business activity overwhelms all other factors affecting location decisions. The cost of complying with environmental regulations has been cited as a major burden on businesses. Is it enough of a burden to influence where businesses locate new plants, which are not restricted in their choice of location? Mani, Pargal, and Huq examine a unique establishment level dataset to find out whether the stringency of environmental regulation affects where firms locate new plants. Using a conditional logit model, they estimate the importance of different variables in plant location choice. After controlling for the impact of factor price differentials, infrastructure, and agglomeration, they find that the number of new plants commissioned in different states of India in 1994 does not appear to be adversely affected by more stringent environmental enforcement at the state level. In other words, an environmental race to the bottom is unlikely. They find that the level of existing business activity overwhelms all other factors affecting location decisions. Reliable infrastructure and factors of production are also critical. This paper - a product of the Environment, Infrastructure, and Agriculture Division, Policy Research Department - is part of a larger effort in the department to study environmental regulation.

The measurement of retail output and the retail revolution

Abstract: The computerization of retailing has made price dispersion a norm in the United States, so that any given list price or transactions price is an increasingly imperfect measure of a product's resource cost. As a consequence, measuring the real output of retailers has become increasingly difficult. Food retailing is used as a case study to examine data problems in retail productivity measurement. Crude direct measures of grocery store output suggest that the CPI for food-at-home may have been overstated by 1.4 percentage points annually from 1978 to 1996.(This abstract was borrowed from another version of this item.)

Production structure, factor substitution, technical change, and total factor productivity in the Canadian logging industry

Abstract: The production structure of the Canadian logging industry is studied using duality theory in production and costs. An unrestricted translog cost function and nine restricted cost functions are each estimated simultaneously with the cost share equations using the Iterative Zellner method. The Allen and Morishima elasticities of substitution among pairs of inputs and price elasticities of factor demands are computed. The difference between the rate of technical change and the total factor productivity is discussed, and both are calculated. Finally, an average cost equation is calculated and the impacts of factor prices are determined. The results indicate that the production structure is homogeneous, but it is not subject to the unitary elasticity of substitution, Hickis neutral technical change, or no technical change. The Morishima elasticities indicate that the substitution of capital by labour or energy is easier than the substitution of labour or energy by capital. Substantial economies of scale are observed in the logging cost. In the rate of technical change, the acceleration term dominates the input factors contribution, and the rate of technical change is negative in all the years. In the total factor productivity growth, in most of the years, the rate of technical change dominates the scale effect. Average cost is the most sensitive to material price followed by labour price, and the least sensitive to energy price.

Does It Matter How Price Promotions Are Operationalized

Abstract: Does it matter if managers use an absolute amount or the relativepercentage discount when determining the optimal price and promotionalstrategy for a good? Intuitively, one might expect that the results ofboth models (deal amount and deal percentage) would be identical. Thisresearch shows that the deal-percentage model dominates the deal-amountmodel on three dimensions: (1) consumers pay more when an amount modelis used, (2) the seller has lower profits and different promotionalstrategies when an amount model is used, and (3) consumer behavior isunrealistically constrained by the amount model. This research showsthat whenever the seller offers a promotion in the deal-amount model,the net price paid by the consumer (regular price minus the deal) isalways higher than the net price in the deal-discount model. Thisresult implies that the ultimate price and promotional strategy (suchas depth of promotion, timing of promotions, and so on) prescribed bythe models are different. Additionally, this research shows that whenconsumers respond similarly in the models, the seller's profits arehigher in the deal-percentage model. This finding is a direct result ofthe higher net price in the deal-amount model. Finally, contrary toempirical findings in the marketing literature, the deal-amount modelrequires consumers to respond more strongly to price changes than topromotions (that is, the promotional elasticity plus one must be lessthan the magnitude of the price elasticity) for the optimal price to bepositive. The deal-percentage model does not place similar restrictionson consumer behavior.

Telecommunications, factor substitution and economic growth

Abstract: I. INTRODUCTION De La Grandville (1989) presents an intriguing graphical analysis of Slutsky equation relationships highlighting certain properties of demand curves in both consumer and factor markets. In particular, the elasticity of substitution emerges as a prominent feature determining the character of economic agents' reactions to changes in price, given money income and output prices. Given income, output prices, and a reduction in the price of a commodity or factor input, de La Grandville finds that higher elasticities of substitution create greater opportunities for leveraging associated alterations in relative prices, thus resulting in a preferred condition (greater "utility") in consumer markets and higher output among producers. Intuitively this is not surprising. A greater elasticity of substitution favoring the price-reduced commodity allows a greater bang per nominal buck. De La Grandville's conclusions engagingly suggest that large elasticities of substitution might be a determinant of historical economic growth among East and South Asian countries or may account for a more rapid evolution of industrial mix within economies undergoing technological change. In considering these hypotheses, one must adhere to the specific conditions that characterize de La Grandville's construction. In the case of commodity markets, the construction involves a commodity, the price of which is falling relative to other commodity prices and to money income. However, de La Grandville's hypothesis really is concerned with factor markets in which a factor price falls relative to other factor input prices and to output prices. Yuhn (1991) presents a recent empirical exploration into one of the de La Grandville hypotheses. Yuhn estimates a factor augmenting translog aggregate cost function for the Korean economy using annual data over the interval 1962 to 1981. From parameter estimates, elasticities of substitution are readily calculated using formulas developed by Binswanger (1974). Yuhn's estimate of the Korean aggregate elasticity of substitution between labor and capital is higher than estimates for the U.S. economy calculated by various researchers using similar methods. In some cases, the differences are substantial. Over the same interval, Yuhn determines that the Korean rental/wage ratio fell at steep annual rates (at least in part due to administrative measures). Unfortunately, however, no comparison is made between the movement of rental rates and output prices, but the reported decline in rental/wage ratios is so steep that it seems highly likely that rental/producer price ratios also declined over the interval in question. Yuhn concludes that his results support the first of de La Grandville's hypotheses: Since Korea's rental/wage decline was much steeper than that of the United States, the elasticity of substitution leverage was greater, and Korean output growth was substantially greater than that of the United States over the interval studied. One can make an empirical exploration into de La Grandville's second hypothesis along similar lines. In the United States, over an interval closely corresponding to the one in Yuhn's study, sweeping technological advances were made in the production, distribution, and consumption of telecommunications services. The analysis here shows that (i) telecommunications service prices fell steeply relative to other factor inputs and to producer prices in general, (ii) sectoral elasticities of substitution between telecommunications and capital are often very high, (iii) consumption of telecommunications as a factor input showed very high growth both in absolute terms and relative to aggregate inputs and to other material inputs, and (iv) the substitution of telecommunications for other factor inputs resulted in very substantial and highly cost effective savings to economy-wide primary resource requirements. II. BACKGROUND Despite the growing role of telecommunications within the American economy, U. …

The Leontiev-Trefler hypothesis and factor price insensitivity

Abstract: This paper reports the results of a new test of the Leontief-Trefler hypothsis that factor-augmenting international productivity differences explain most of the cross-country variation in factor prices.

The justice of the just price

Abstract: The medieval notion of the just price was an outcome of neither an exclusively economic analysis nor a completely ethical argument, but an amalgam of some features of each. At issue is the significance the medievals attached to the concepts of price and justice and how an integrated economics and ethics made for a mode of reasoning about price different from the endogenousty focused price theory and limited boundaries of modern economics. It is argued in 'The Justice of the Just Price' that the treatment of price in medieval economic thought cannot be grasped without a comprehensive approach to its determination. The argument will first focus separately on the description of the medieval notions of price (cost of production, need, etc.) and of justice (virtue/vice) as features of the medieval concept of the just price. It proposes that, by virtue of the fact that the premises of the medieval system of analysis assumed greed as a nefarious part of human economic behaviour and presupposed the necessity of j...

Commodity Price Stabilization in a Peasant Economy

Abstract: The peasant household's preferences for price stabilization are shown to depend on observable parameters describing consumption and production decisions. A measure of willingness to pay is obtained for the case where the household is engaged in both the production and the consumption of the commodity in question. For plausible parameter values, it appears likely that the peasant household will prefer price stabilization and that stabilization of the producer price alone dominates complete stabilization.

Decomposition of Technological Change and Factor Bias in Indian Power Sector: An Unbalanced Panel Data Approach

Abstract: Technological change and factor bias in the Indian power sector are analyzed using a translog cost function. Various components of technological progress and factor bias are identified and estimated, using a 21 year unbalanced panel data of Indian states and union territories. Heterogeneity across states is incorporated in the model using a variance component model. Appropriate corrections are made for unbalanced panel data. Empirical results show that the annual average rate of technological progress has been 2.4% for the country as a whole. Accumulation of knowledge and increasing scale are found to be the major factors contributing to technological progress. In contrast, the effects of factor price changes and fixed capital accumulation on technological progress have been unfavorable. Pure factor bias measure indicate saving in the use of fuel and labor, and increased use of materials. Tests are performed to check the curvature properties of the underlying technology.

Occupational Employment and Wage Changes in the UK: Trade and Technology Effects

Abstract: Recent studies, most notably of US labour markets, have identified a growing trend of inequality in both wages and employment opportunities. Less skilled, lower wage workers have experienced a decline in their relative wages at the same time that their share in total employment has also declined. More skilled, more highly paid workers have experienced more rapid growth in real wages accompanied by an increasing share of total employment. Evidence of a similar pattern of change also exists for the UK.

Does environmental regulation matter? Determinants of the location of new manufacturing plants in India in 1994

Abstract: The cost of complying with environmental regulations has been cited as a major burden on businesses. Is it enough of a burden to influence where businesses locate new plants, which are not restricted to their choice of location? The authors examine a unique establishment level dataset to find out whether the stringency of environmental regulation affects where firms locate new plants. Using a conditional logit model, they estimate the importance of difference variables in plant location choice. After controlling for the impact of factor price differentials, infrastructure and agglomeration, they find that the number of new plans commissioned in different states of India in 1994 does not appear to be adversely affected by more stringent environmental enforcement at the state level. In other words, and environmental"race to the bottom"is unlikely. They find that the level of existing business activity overwhelms all other factors affecting location decision. Reliable infrastructure and factors of production are also critical.

Scissors or Horizon: Neoclassical Debates about Returns to Scale, Costs, and Long-Run Supply, 1926-1942

Abstract: Modem treatment of long-run (U-shaped) cost curves developed from reactions to Sraffa's criticisms of Marshall. He argued that internal (dis)economies were incompatible with partialequilibrium analysis under perfect competition. Pigou concurred and drew L-shaped cost curves; Viner realized that this made firm size indeterminate and industry output volatile. Using Austin and Joan Robinson's analyses, Stigler justified rising costs/supply, determinacy, and stability by irrational entrepreneurs enduring coordination failure and by factor price changes. We conclude that consistency requires constant costs but firm employment, output, and factor incomes remain theoretically indeterminate. It becomes likely that large firms will undermine perfect competition.

Price structures, cross-subsidies, and competition in infrastructure

Abstract: Governments often regulate not only the overall level of prices charged by infrastructure firms but also the relationship between prices for different services or customers. Prices can differ among different types of customers, even when no customers can be said to be subsidizing another, for example, when one asset is used to supply a service to two or more groups of customers. One of the hurdles that governments must overcome in introducing competition in infrastructure is dealing with the social and political implications of changing price structures, or rate rebalancing. Generally, competition should reduce overall costs in the sector, lessening the need to compensate groups hurt by price increases resulting from rate rebalancing. But if the efficiency gains are not enough to offset the price increases for some groups and the government is worried about the political and social costs of rate balancing, it has three basic options: 1) preserving the old price structure; 2) funding price subsidies from general tax revenue rather than from transfers within the firm or industry; and 3) relying on social safety nets rather than price subsidies. Whichever option a government chooses should stand up against the following four tests: 1) Do subsidies reach the people the government most wants to support? 2) are the costs clear and measurable? 3) Are the administrative costs as low as possible? 4) Is the revenue raised from the source that entails the least cost to the economy? This Note looks at the three options in practice and reviews how they measure up against the four criteria. It concludes that governments should eliminate price subsidies if politically feasible. But even if they cannot, they can still reap the benefits of competition.

Do border economies generate comparative advantages for small- and medium-sized enterprises? : Evidence from the Maquiladora industry

Abstract: Maquiladora assembly emerged to solve a specific problem in a specific region. In the mid 1960s, it was designed to absorb unemployment and to foster industrialization at the US-Mexican border. In the course of its development, it developed considerable dynamics with respect to both regional distribution and technological diversification. Beyond initial intentions, maquiladora assembly proved to be a powerful instrument to foster modernization and international integration of the Mexican economy. Maquiladora assembly is based on factor price differentials and a favourable location with respect to the US-market. It has been developed by private agents learning to tap these potentials. They successfully intensified labour division among themselves. Most importantly, they invented so-called Shelter Plan arrangements as privately marketed services to overcome risk barriers to international integration. A passive, i.e. liberal stance of economic policy proved to be supportive. The implication for economic policy in transformation economies is that an adequate assignment of responsibilities among market and state is at least as important as efficient labour division among private agents.

Free Trade and Income Redistribution in a Three Factor Model of the U. S. Economy

Abstract: The move toward free trade promises to alter the distribution of income in the U.S. Labor groups generally do not favor the move toward free trade, which can be characterized by the continuing decline in the price of manufactured goods relative to business services. The present study predicts that unskilled labor in the U.S. will lose under a program of free trade, using a general equilibrium model of production. Factor shares, industry shares, and estimates of substitution for skilled labor, unskilled labor, and capital are used to examine comparative statics. The interplay of factor intensity and factor substitution in the three factor production structure has proven a considerable analytical challenge. Building on the textbook production model with two factors, the third productive factor allows technical complementarity and creates a more complex pattern of factor intensity. Both factor intensity and factor substitution affect the qualitative nature of the comparative statics. Little is known about the model's quantitative properties. A 3 x 3 model with outputs of the three major sectors (agriculture, manufacturing, services) is specified, and a 3 x 2 model without agriculture is also examined. Factor substitution is estimated with production function across states. Skilled labor separated by various Census categories cannot be aggregated with unskilled labor in any sector, and constant returns to scale cannot be rejected as a null hypothesis. Additionally, the three inputs (capital, labor, skilled labor) are all technical substitutes. Comparative static results follow a pattern suggested by factor intensity. Changing prices of goods generally have elastic effects on factor prices. Stolper-Samuelson results, in other words, have a quantitative weight. Price changes due to a program of free trade will significantly affect income distribution. Similarly, Rybczynski type results are quantitatively significant in that factor endowment changes have elastic effects on outputs. The implication is that output patterns will differ significantly across freely trading partners. Elasticities of factor prices with respect to endowment changes, on the other hand, are very inelastic. This inelasticity suggests that there would only be small long run effects of international migration, capital flows, or endowment differences on the international pattern of factor income. This inelasticity is called near factor price equalization (NFPE). Under NFPE, freely trading countries will experience a vector of factor prices nearly equal to each other. NFPE suggests that the qualitative effects of changing or different factor endowments