scispace - formally typeset
Search or ask a question
Topic

Homothetic preferences

About: Homothetic preferences is a research topic. Over the lifetime, 193 publications have been published within this topic receiving 3748 citations.


Papers
More filters
ReportDOI
TL;DR: In this article, the authors present conceptually correct tests of the Heckscher-Ohlin proposition that trade in commodities can be explained in terms of an interaction between factor input requirements and factor endowments.
Abstract: This paper presents conceptually correct tests of the Heckscher-Ohlin proposition that trade in commodities can be explained in terms of an interaction between factor input requirements and factor endowments. Most prior work that claims top resent tests of this hypothesis have used intuitive but inappropriate generalizations of the traditional two by two model to deal with a multidimensional reality. Moreover, prior work has in general used measurements on only two of the three variables(trade, factor input requirements and factor endowments) that are required for a proper test of the H-O theory.We derive an exact specification of the H-O interaction in a multicountry, multicommodity, multifactor world in the form of the Heckscher-Ohlin-Vanek (H-O-V) theorem which equates the factors embodied in net trade to excess factor supplies.This theorem implies sign and rank propositions analogous to those implicitly studied by Leontief, but it also implies hypotheses about the parameters linking factor contents and factor supplies. Accordingly, we conduct tests of the sign and rank propositions as well as several parametric hypotheses which permit various assumptions about measurement errors, nonproportional consumption and technological differences. Our analysis uses separately measured data on trade, factor input requirements and endowments for twenty-seven countries and twelve factors in 1967. Tests of the Leontief type sign and rank propositions sharply reject this facet of the H-O-V model. In particular, the sign of net factor exports infrequently predicts the sign of excess factor supplies and therefore does not systematically reveal factor abundance.The results from an extended set of tests conducted in a regression context reject the H-O-V hypothesis of an exact relationship between factor contents and national factor supplies. Support is found for the H-O--V assumption of homothetic preferences, but estimates of the parameters linking factor contents and factor supplies are found to differ significantly from their theoretical values. We find there is clear evidence that the departure of the estimated coefficients from their theoretical values is importantly related to differences across countries in the matrix of factor input requirements and, by implication, to violation of the assumption of factor price equalization. We also find that errors of measurement in both trade and national factor supplies are an important reason for rejection of the H-O-V hypothesis.

468 citations

Journal ArticleDOI
TL;DR: For example, Sato and Sato as discussed by the authors showed that the ideal log-change index corresponds to the addilog preference ordering introduced by Houthakker (1960), which is the self-dual preference ordering that corresponds to our ideal logchange index.
Abstract: RICE and quantum indexes (P, Q) are dual to each other if PQ = E where E is the expenditure index They satisfy the weak factor reversal test' If they share an identical weighting formula as weighted averages of price and quantity relatives, they satisfy the strong factor reversal test, that is, they are ideal The most celebrated ideal economic index is the one associated with the name of Irving Fisher though it was discovered before him No ideal index as simple as Fisher's has been discovered since Log-change index numbers have become increasingly popular in recent years, particularly as an approximation to the theoretically desirable Divisia index Theil (1973) proposed a new log-change index number that alhnost satisfies the strong factor reversal test I derived several alternative formulas that improve in the degree of approximation (Sato, 1974b) But neither Theil nor I was able to obtain the ideal log-change index In section II, I report its discovery Our pessimism has proved premature Indeed, the formula was self-evident from the very beginning -we simply failed to see it2 There are dual dualities between economic indexes and homothetic preferences (Samuelson and Swamy, 1974) A price or quantum index is associated with a homothetic indirect or direct preference ordering If P and Q are dual to each other, so are the direct and indirect preference orderings corresponding to them If P and Q are ideal, the latter are not only dual but also share an identical mathematical form They are strictly self-dual as I call them elsewhere3 An obvious example is the association of Cobb-Douglas indexes and preferences A less obvious example is the association of Fisher's ideal indexes and quadratic preferences The association itself was discovered by Konuis and Buscheguence a half century ago in 19264 Note that homothetic quadratic preferences are self-dual Then, what is the selfdual preference ordering that corresponds to our ideal log-change index? We shall show in section III that it is the CES function that has become so popular in the economic literature, originally discussed by Bergson (1936), rediscovered by Solow (1956), and popularized by Arrow et al (1961) The CES function is known to be self-dual (Samuelson, 1965) and yet the economic index associated with it has eluded discovery until now Economic indexes are useful because they apply even when underlying preferences are not homothetic5 We shall show in section IV that the ideal log-change index corresponds to the addilog preference ordering introduced by Houthakker (1960)

371 citations

Posted Content
TL;DR: This article collected and unified a number of disjoint points in the existing literature and built further on them using simple and tractable alternative preferences, which helps explain such diverse phenomenon as growing wage gaps, the mystery of the missing trade, home bias in consumption and the role of intra-country income distribution, solely from the demand side of general equilibrium.
Abstract: A major role for per-capita income in international trade, as opposed to simply country size, was persuasively advanced by Linder (1961). Yet this crucial element of Linder's story was abandon by most later trade economists in favor of the analytically-tractable but counter-empirical assumption that all countries share identical and homothetic preferences. This paper collects and unifies a number of disjoint points in the existing literature and builds further on them using simple and tractable alternative preferences. Adding non-homothetic preferences to a traditional models helps explain such diverse phenomenon as growing wage gaps, the mystery of the missing trade, home bias in consumption, and the role of intra-country income distribution, solely from the demand side of general equilibrium. With imperfect competition, we can explain higher markups and higher price levels in higher per-capita income countries, and the puzzle that gravity equations show a positive dependence of trade on per-capita incomes, aggregate income held constant. In all cases, the effects of growth are quite different depending on whether it is growth in productivity or through factor accumulation. The paper concludes with some suggestions for calibration, estimation, and gravity equations.

177 citations

Journal ArticleDOI

167 citations

Journal ArticleDOI
TL;DR: In this paper, a two-country real business cycle model with Arrow-Debreu preferences is presented, where preferences are not separable between consumption and labor supply, and the model allows for fluctuations in labor supply in equilibrium and generates correlations between national consumption rates which are close to some of those observed in historical data.

157 citations

Network Information
Related Topics (5)
Productivity
86.9K papers, 1.8M citations
79% related
Interest rate
47K papers, 1M citations
79% related
Wage
47.9K papers, 1.2M citations
79% related
Income distribution
22.1K papers, 653.4K citations
79% related
Monetary policy
57.8K papers, 1.2M citations
79% related
Performance
Metrics
No. of papers in the topic in previous years
YearPapers
20213
20204
20193
20186
201710
201614