Knowledge that Transforms

I NTERNATIONAL trade in commodities such as steel, synthetic rubbers, plastics, electronics, chemicals, and man-made fibers takes place primarily among the advanced, industrial countries of Western Europe, the United States, and Japan. The Heckscher-Ohlin model, which dominated the work of interna.tional economists from the twenties to the sixties, has proven inadequate to explain the trading patterns of these commodities. There appear to be two major reasons for this seemingly poor explanatory power: (1) the relative similarity of the factor endowments of the industrialized countries, and (2) the assumption of uniform global technology for each industry, an assumption which is untenable for a number of industries the products of which are traded internationally.' Two accepted theories which appear to be capable of explaining part of the trade which takes place among the advanced countries are the Doctrine of Comparative Costs and the scale economies theory. Both of these theories argue that trade takes place because of differences in unit production costs. One of the causes of different unit production costs is differences in the wages and productivity of workers. Unit production costs may also differ because total output of certain products in certain countries is such that the industries of these countries are larger than the industries of these countries are larger than the same industries in other countries. Since internal and external economies of sca.le are significant in a number of industries such as the steel industry, one would expect those countries with the larger industries to be able to produce commodities at lower unit production costs, ceteris paribus, than those countries whose industries are small, if the industry in question is subject to significant internal and/or external economies of scale.2 A third reason for differences in unit production costs is differences in the production, techniques used by industries producing a given array of products in different countries. Production techniques may differ because entrepreneurs in different countries may adopt innovations in an industry at different times. This is the essential argument put forward by the recently developed Posner Technological Gap Theory. The Posner Technological Gap Theory is among the most promising theoretical arguments put forward for the trading patterns of products traded principally among the advanced countries.3 Posner adopted all of the

EMPIRICAL studies of aggregate price equations have shed little light on the choice among alternative theories of price-setting behavior. Specification of the price equation generally makes appeal to both profit maximizing and average cost pricing assumptions.1 Yet little effort has been spent in testing the comparative explanatory power of these alternatives.2 The choice among theories has important implications. The expected pattern of pricewage interactions, questions of bias and identification of the price equation, and use of the price equation for forecasting should all be analyzed with respect to particular hypotheses concerning pricing behavior.3 The need is for more explicit formulation of models and testing of hypotheses. A test of the relative explanatory power of a perfectly competitive model and a general version of average cost pricing is reported in this paper. Two supply and demand models of the final output of the manufacturing sector are specified. These show important differences in the relationship between the price level and its determinants. An empirical test for the United States manufacturing sector is provided.

Eric J. Toder, The Supply of Public School Teachers to An Urban Metropolitan Area: A Possible Source of Discrimination in Education, The Review of Economics and Statistics, Vol. 54, No. 4 (Nov., 1972), pp. 439-443

RECENT years have seen considerable progress toward an integration of the theory of consumer's choice with empirical demand analysis. Theory has been extended so as to bring dynamic adjustment and the effects of past expenditure decisions (primarily through the introduction of certain state variables) into its purview,1 while on the empirical side there now exist a number of studies whose demand functions respect to a letter the restrictions imposed by classical theory.2 Unlike the demand theorist, content to assume the existence of continuous partial derivatives through the second order and to specify the signs of first derivatives, the applied analyst must go considerably further and specify the actual analytical form of the utility function. Herein, however, lies one of the major obstacles to the continued progress in applied demand analysis, for the list of functions which are rich enough to incorporate the restrictions imposed by theory, but yet sufficiently simple to be estimated with the data and techniques at hand is not lengthy. Included in this list are: (1). The additive quadratic utility function used by Houthakker and Taylor (1970) and also by Phlips (1971); (2). The linear-expenditure system based on the Geary-Samuelson utility function employed by Stone and his associates (1954, 1965) and most recently by Phlips (1972); and (3). The Rotterdam system of demand functions developed by Barten and Theil.3 The present work was motivated initially by a desire to devise a better method of estimating the additive quadratic model (AQM) than that used by Houthakker and Taylor. In particular, H and T observed a tendency for the estimated marginal utility of income to decrease sharply at the very end of the sample period, and averred that this probably reflected a defect in the method of estimation (p. 230). However, once we began exploring this, it became clear that the defect was in the quadratic utility function itself. Accordingly, we then undertook a critical look at the appropriateness of the AQM as a tool for empirical research, and in so doing decided to do the same with the linear expenditure system (LES).

Where G is the geometric mean rate of return on the individual's net worth. W,k is the kth individual's initial wealth. Using this approximation, the market price of risk, 4)-1, is equal to HaIM. The inclividual investor's risk aversion is W11,-1, E(1 R1,) _ W*1,k, and HaIM (I W*1k)l. k Under the assumption that expected future prices are independent of current prices, the market price It may be noted that the Bernoulli utility function, unlike the quadratic and exponential utility of risk is unaffected by changes in the number of investors.

that the ordinary least squares coefficient corresponding to the variable with the error will be biassed downward (in absolute value), and it is also seen that the direction and extent of bias in the other coefficients will depend directly on the covariances between those coefficient estimates and that of the offending variable. In particular, it may be useful to note that the sign of the bias is given by: sgn ( gj 8 *j) = ( l)(sgn cov ,2j,, ) (sgn j,

ACCORDING to the queue concept of f1~ markets, wages are attached to jobs and jobs are rationed among those seeking work in accord with the employer's preferences. If the supply of exceeds the employer's demands, the employer will attempt to hire only the labor (defined by the employer) at the established wage. On the other hand, if the employer's demand for equals or exceeds the available supply, all the will be hired, In the case of excess supply, the which is hired will on the average be than in the case in which excess supply does not exist. Traditionally the supply curve representing all available to an employer assumes the homogeneity, or at least a constant average quality, of the labor. When an excess supply exists at a given wage, the employers, by being able to hire the labor, obtain the amount of demanded at a higher average quality. This amount of will lie to the left of the supply curve of all available labor. However, another supply curve to the left of the total supply curve, assuming a higher average quality, can be defined such that any excess supply will be just eliminated at the given wage. The market for military (volunteers) can be characterized precisely by the queue concept. Volunteers to each of the military services face a wage determined by Congress.' Each service would like to recruit (i.e., hire) the better volunteers. Since the Army has not enjoyed an excess supply of volunteers, it has been forced to accept all volunteers above a minimum quality level and to satisfy its demands with inductees. On the other hand, the Air Force has usually had an excess supply, and hence has been able to cream from its better volunteers.2 Some of this excess supply can be strictly attributable to youth who want to avoid military service in the Army; rather than be drafted they enlist in the Air Force but still prefer civilian life to military life. Because the draft has affected considerably the number of volunteers to the military services, previous studies by Altman (1969), Altman and Fechter (1967), Fechter (1968), Fisher (1969), Hause and Fisher (1968), and Oi (1967), have focused on the recruiting problems of the military, specifically the Army, in a no-draft world. None of these studies, however, determined a specific supply curve for the Air Force. This may be due in part to the fact that the supply curve of Air Force volunteers is not directly observable. Data are not available on the total number of individuals who volunteer, but only on the number who are actually accepted as enlistees. So attempts to estimate supply curve parameters in traditional ways yield erroneous results. In this paper we circumvent this difficulty by developing a supply curve adjusted by the quality of the recruits and we demonstrate that this quality adjustment is an implicit equilibrating mechanism between the (short run) perfectly inelastic demand for recruits and the supply of volunteers. Under certain assumptions the parameters of the unobservable supply curve can then be inferred from the quality-adjusted supply curve. This method of incorporating a quality adjustment in estimating the supply of volunteers is applicable to virtually all markets. Most markets have substantial quality variations among the units supplied and not all applicants receive positions at the established Receixed for publication January 28, 1971. Revision accepted for publication November 18, 1971. * Any views expressed in this paper are those of the author. They should not be interpreted as reflecting the views of The RAND Corporation or the official opinion or policy of any of its governmental or private research sponsors. Papers are reproduced by The RAND Corporation as a courtesy to members of its staff. The paper has benefited from the helpful comments of Harrv J. Gilman, John P. White and a referee, but all errors are the sole responsibility of the author. 1 The recruiting procedures of the Air Force and the relevant institutional framework are detailed in a lengthy report on Air Force volunteers by Cook (1971). 2 The process of creaming involves the selecting of the better volunteers from all those available.