George E. Bates, Difficulties in Determining Investment Policies, The Review of Economics and Statistics, Vol. 42, No. 3, Part 2. Higher Education in the United States: The Economic Problems (Aug., 1960), pp. 214-218

PpT HE term underdeveloped is often used to refer either to countries with low incomes or to countries in which the level of per capita income is not rising, without clear discrimination between the two concepts. The purpose of this paper is the simple factual one of presenting two classifications of all the areas of the world, one according to their levels of per capita income and one according to whether continuing rise in per capita incomes seems to have begun, and of noting the degree of congruence between the two lists.'

Millard E. Gladfelter, State Aid for Private Institutions in Pennsylvania, The Review of Economics and Statistics, Vol. 42, No. 3, Part 2. Higher Education in the United States: The Economic Problems (Aug., 1960), pp. 91-92

IN a growing economy, current replacement falls short of depreciation. The implications of this fact were discussed at length in a paper by E. D. Domar.' The nature of the subject did not allow Domar to indicate the relationship between the two magnitudes in explicit form; in their place he had to present numerical illustrations. In the case of the individual firm, we can go one step further. Obviously a firm that buys its equipment first-hand will accumulate depreciation funds ahead of the replacement necessity. If the firm decides to reinvest the depreciation allowance, its gross or operating capital, in terms of performance, will increase for some time, although of course the value of the net capital stock by definition would remain constant. This is so because the performance of adequately maintained equipment declines less in proportion to depreciation. At the same time the average lifetime of the equipment items making up the gross capital stock will change. Since the initially installed equipment has to be replaced at some time, the rise in the gross stock from reinvestment of depreciation allowances will be interrupted discontinuously: the gross stock will suffer an abrupt decline, after which it will rise again. Let us give a simple illustration, the basic premises of which will be specified later on. Suppose a railroad invests at the beginning of I957 $IO million worth of rolling stock of a lifetime of exactly ten years, and applies straightline depreciation, amounting at the beginning to $i million per annum. It reinvests after the end of each year the depreciation allowance which was set aside in the preceding year, in rolling stock of the same kind. Assuming that prices do not change, the stock would grow as follows: Beginning of I957 $IO million I958 i i million I959 I2.I million, etc.

analysis; analysis 2 is the first additional analysis referred to above; analysis 3 is the second. It should be noted that use of the BLS series rather than Suits's series raises the square of the multiple correlation coefficient from o.85 (implying an adjusted coefficient of multiple correlation of 0.93) to 0.95, significantly higher. However, when contract duration is still used to divide real retail price (analysis 2), the coefficient of the ratio, and hence the elasticities with respect to price and contract duration, are not significantly altered. However, treatment of average contract duration as a separate variable (analysis 3) significantly changes the price elasticity but leaves the elasticity with respect to contract duration unchanged. Analysis 3 yields a price elasticity which is not markedly different from those obtained by previous investigators. The conclusion must be, I think, that by dividing real retail price by average contract duration, Suits imposed an unwarranted restriction on his statistical analysis and reduced his price elasticity to an unreasonably low level, while increasing his income elasticity to a level somewhat beyond that found in earlier investigations. Thus the influence of the automobile manufacturers on the sales of their product may well be greater than we might be led to believe on the basis of Suits's analysis. One further shortcoming in the way in which Suits introduces credit terms stems from the fact that credit terms are likely to affect new car sales differently in a decline than in an upswing. Availability of credit is a limiting factor primarily in those periods when, for other reasons, there are pressures for rapid expansion in sales. Thus, the marked easing of automobile credit terms in I955 may be regarded as permissive rather than causal. The fact that automobile credit remained relatively easy in I958 did little to stem the decline. One way ;to take account of this asymmetry in the effect of credit terms would be to allow for different elasticities with respect to average contract duration in periods in which sales were declining and in periods in which sales of new cars were increasing. However, Suits did not do this.9