Knowledge that Transforms

Gordon C. Rausser, J. W. Freebairn, Estimation of Policy Preference Functions: An Application to U.S. Beef Import Quotas, The Review of Economics and Statistics, Vol. 56, No. 4 (Nov., 1974), pp. 437-449

THE foreign sector in conventional macroeconomic models has not been properly integrated with behavioural relationships in the rest of the economy. The aggregate producing sector is usually depicted as employing primary factors, capital and labor, to produce a single output which simultaneously satisfies the demands of consumers, producers, governments, and foreigners. In this one-sector model, imports are implicitly assumed to be either final goods which enter the utility functions of consumers, or intermediate goods which are separable from primary factors in the productive process. The first assumption conflicts with empirical evidence that the bulk of international trade occurs in intermediate goods, while the second assumption involves a substantive restriction on the form of the technology which ought to be examined and justified empirically rather than assumed a priori. Most goods entering international trade require further processing before delivery to final demand. This processing requires the services of domestic primary factors of production which could be employed elsewhere. An important issue for public policy concerns the effect of trade and trade barriers on the distribution of factor income. If final demand can be satisfied either by employing domestic primary factors or by importing materials, then changes in import prices will, in general, alter the competitive returns to the primary factors. The usual assumption adopted for empirical work, namely that imports are final goods with no close domestic substitutes, rules out any income distribution effects resulting from a change in import prices. Previous investigators have estimated import demand equations by regressing the logarithm of a measure of imports on the logarithm of national income and the logarithm of the ratio of the price of imports to the price of domestic value added.' While this functional form has the advantage that the parameters measure the price and income elasticities of demand, it is not derivable from an underlying model of optimal behaviour, and it assumes that imports are final goods which are separable from all other commodities in the utility function of the consuming sector. Until very recently most empirically tractable functional forms have imposed separability restrictions a priori. Thus, even if one were to proceed from micro-economic foundations by assuming a constant elasticity of substitution functional form to model the taste or technology of the decision unit, the assumption of separability between imports and alternative factors or commodities would constitute a maintained hypothesis that could not be tested.2 The one output specification provides no way of explaining changes in the relative prices of various categories of final demand. It will only be appropriate for explaining the composition of inputs if the technology is separable with respect to a partitioning between inputs and outputs. In this case, the cost minimizing input bundle is independent of the composition of output, and, for purposes of explaining factor demands, one can pretend that a single output exists. Separability between inputs and outputs implies that marginal rates of substitution between pairs of factors are independent of the composition of output, and marginal rates of

ONE of the most important relationships I in economics is that between the production of real output on the one side and the employment and unemployment of labor on the other. In the familiar breakdown of an economy into its simplest functions a goods market, a labor market, and one or more financing markets1 this relationship comprises the interface between the goods market and the labor market. The relationship is all the more important in that a number of researchers have connected price movements in the goods market directly to quantity movements in the labor market, relying upon both theories of administered pricing and empirical observations of Phillips curve phenomena. Much of current economic thinking relies on the same approach to incorporating the outputunemployment relationship into a macroeconomic framework: Both Keynesians and Chicago school monetarists typically apply their varied apparati to explaining or forecasting movements in real output, and then rely on some type of Okun's Law (1962) formulation to move from real output to a discussion of unemployment. A variant adopted by some neoclassical theorists is to use prices, wages and expectational variables to explain movements in labor market variables -employment or unemployment; these writers then revert, however, to some simplified structure such as the inverse of Okun's Law to move from the labor market to the goods market. For either group, the behavior of whichever market is of primary interest takes precedence over the relationship between the two markets. The object of this paper is to focus clearly on the goods market -labor market nexus. The paper derives and estimates an empirical relationship of Okun's form and shows that this relationship is more complex and merits more explicit attention than the current literature implies. In particular, Okun's approach of estimating the unemployment rate directly constitutes an alternative to estimating employment and labor force separately, and using an identity to solve for the unemployment rate, apart from Okun's paper; this approach has largely predominated in the literature of labor market economics.2 Especially from the standpoint of economic forecasting, at least one revealed weakness of the more commonly used indirect approach has been, in recent experience, its inability to generate accurate predictions of the unemployment rate. Errors made in the various equations of the analysis apparently have not been on the whole sufficiently offsetting to render the indirect approach adequate for forecasting and applied policy work. In this context a single direct unemployment equation may have appeal over a model in which the unemployment forecast is the residual which represents the difference between the labor demand forecast and the labor supply forecast.3 The primary output of the paper is, therefore, an unemployment equation which takes real output as given and introduces other independent variables to improve the specification of the goods market labor market relationship. Hence it is also necessary to

FISHER and TEMIN (1973) have argued recently that many empirical studies1 re-lating to the Schumpeterian hypothesis are in-appropriate for testing that hypothesis. They

THIS PAPER DEMONSTRATES A NEW REVEALED PREFERENCE APPROACH TO VALUATING TIME. THE FULL-PRICE DEMAND FUNCTIONS, WHEREIN DEMAND DEPENDS UPON THE SUM OF MONEY PRICE AND TIME COST, MAY BE OBTAINED FROM NEOCLASSICAL DEMAND THEORY WITHOUT RESORTING TO THE USE OF LEISURE, OR THE CONSUMER PRODUCTION FUNCTIONS OF THE BECKER MODEL. THE RESTRICTIONS ON THESE DEMAND FUNCTIONS PROVIDE AN INDIRECT MEANS OF ESTIMATING THE VALUE OF TIME. IN THE EMPIRICAL SECTION, THE VALUE OF TIME IS ESTIMATED FROM AIR TRAVEL DATA AND IS DERIVED, VIA THE INDIRECT PROCEDURE DEVELOPED, FROM OTHER DEMAND STUDIES. /DOT/

OW important is it to avoid moderate inH flation, such as we have suffered intermittently since World War II? Until the 1950's there were virtually no empirical studies of the effects of inflation on the level or distribution of output and wealth, except for the great hyperinflations. Recent years have seen extensive development of the theory of inflation and a few exploratory empirical studies of the tosts of moderate, non-run-away inflation, but we still have only limited information on these costs as a basis for policy judgments, for example, when we face the much-discussed trade-off between inflation and unemployment.' This paper examines the redistributional effects of inflation on wealth-holdings of households and corporations, extending the exploratory studies just noted by utilizing information on the moderate United States infhtion during the last two decades.2