Knowledge that Transforms

Using the same sample of 100 countries for 1966 as Sommers and Suits,3 we obtained the following equation 4 GCF/GNP 26.87 (1.04) 4676.54 / (GNP/N + 300). (629.25) R2= .4 (4) Comparing this result with the estimation of the quadratic equation (1) of Sommers and Suits,5 we see that both equations have similar statistical properties. Using (4) as the basis for simulations of the growth path, however, we obtain completely different results from those of Sommers and Suits. Now per capita income does not attain a stationary level, but grows exponentially. The growth rate of per capita income, however, as can be seen from figure 2, attains a stationary level at 4.41 per cent per year. FIGURE 2. SIMULATED GROWTH RATE OF GNP PER CAPITA

GCF gross capital formation GNP gross national product N population r growth rate of GNP/N. After fitting this model to a cross section of 100 countries for 1966, they use the estimated coefficients to simulate a growth path of a typical economy. In this comment it will be shown that the simulation results depend critically on the quadratic sDecification of equation (1) .2 Although the estimation of equation (1) by Sommers and Suits gives satisfactory results, there is little empirical evidence for the declining range of the equation. This can easily be seen from the scatter diagram and the graph of the fitted equation (figure 1): GCF/GNP attains its maximum when GNP/N is $2,169. The sample, however, contains only 8 countries (out of 100) with a per capita income of more than $2,169. Except for the single case of the United States (GNP/N $3,763 and

Haitovsky, Y., Multicollinearity in Regression Analysis: Comment, this REVIEW, LI (Nov. 1969), 486-489. Hocking, R. R., and R. N. Leslie, Selection of the Best Subset in Regression Analysis, Technometrics, Vol. 9, No. 4 (Nov. 1967), 531-540. Kendall, M. G., A Course in Multivariate Analysis (London: Charles Griffin and Company Ltd., 1957). Kendall, M. G., and A. Stuart, The Advanced Theory of Statistics, 3 (London: Charles Griffin and Company Ltd., 1966). Lancaster, K., Mathematical Economics (New York: Macmillan Company, 1969). McCallum, B. T., Artificial Orthogonalization in Regression Analysis, this REVIEW, LII (Feb. 1970), 110113. Mitchell, B. M., Estimation of Large Econometric Models by Principal Component and Instrumental Variable Methods, Technical Report no. 28 (Economic Series), (Stanford, Institute for Mathematical Studies in the Social Sciences, Stanford University, 1970). Stewart, J., Letter to the Editor, The American Statistician, 25 (Apr. 1971), 40. Theil, H., Economic Forecasts and Policy, 2nd ed. (Amsterdam: North-Holland Publishing Company, 1961).

IN 1963 Nissan Liviatan tested the Permanent-Income Hypothesis (PIH) as an errors in variables model and used a combined crosssection time-series body of data consisting of the 1958-1959 Israel Reinterview Savings Survey. His findings were weakened (i) by the fact that a savings survey was used which meant that consumption was not independently estimated but rather was computed as a residual; hence, consumption and income had a common measurement error which thus violated a basic assumption of the model that the covariance between transitory income and transitory consumption is zero; and (ii) by the fact that, if the horizon is in fact three years, then income lagged one year cannot be used as an instrumental variable. Milton Friedman, in his rejoinder accompanying Liviatan's paper (1963), suggested that it would be most desirable that a Livia.tantype analysis be applied to data not marred by common errors of measurement and that such data span a three-year period so that income or consumption for one year could be used as an instrumental variable for a year at least two years later or earlier. In this paper both criteria will be met income and money demand are independently estimated and cross-section data covering a three-year period are used. In addition, this paper extends the PIH of aggregate consumption to individual consumer goods. The generalization results from relaxing Friedman's assumption of a linear homogeneous consumption function (unitary income elasticity). Since Friedman has elsewhere (1959) suggested that money can be looked on as a consumer durable, it will be money that this study uses as its consumer good. The methodology, however, is completely general and any other consumer good could have been chosen.

to GNP as the CEA had anticipated that it would. As a general conclusion to this brief paper, the following points can be made. The CEA was wrong in stating in its 1963 Report that the tax cut would lessen the sensitivity of income tax revenue to GNP. As a matter of fact, the tax cut of 1964 increased that sensitivity. As a consequence of this increase, the built-in flexibility of the tax declined less than anticipated and would soon recover the before-1964 value. This increase in elasticity would have increased the need for frequent tax reductions if expenditure had continued to increase at the rate that would have been realistic to assume in 1964. The elasticity of the rate structure increased in importance and became almost as important as that of the base. REFERENCES

D. M. Schydlowsky, M. Syrquin, The Estimation of CES Production Functions and Neutral Efficiency Levels Using Effective Rates of Protection as Price Deflators, The Review of Economics and Statistics, Vol. 54, No. 1 (Feb., 1972), pp. 79-83

The three primary conclusions of my previous study can be summarized briefly. First, there appears to be a permanent excess demand for physicians' services. The observed prices and quantities are not points on the demand function and the market does not follow a Marshallian or Walrasian process of adjustment to remove the excess demand. Second, physicians' fees rise when patients' ability to pay improves through higher income or more complete insurance coverage. More than a third of the potential gain from improved insurance coverage has been dissipated by induced price increases. Third, the supply equation indicates that physicians reduce the quantity of services provided when fees rise. This in turn implies that government action to control physicians' fees may increase the quantity of services provided. Professors Brown and Lapan raise some questions about the research and about the first and third of these conclusions. However, a careful analysis of their note shows that the original conclusions can remain unchanged. Their own discussion, on the other hand, contains a number of serious errors.

imports, where quoted import price indexes are used to avoid serious measurement errors and information on changes in the variables over years is utilizecl. It has been found that the elasticity is numerically larger for finished goods than for crude materials and intermediate goods. Effects of time lags are different between commodity types; in the case of finished goods, adjustment to price changes seem to be completed within a year, but for materials or intermediate goods, adjustment seems to take longer. There is an evidence, which is not very strong, that shows that the progressive trade liberalization that has taken place in Japan has worked to increase the numerical value of the elasticity of substitution.