I. Introduction, 161. — II. The discrete time model, 162. — III. Definitions, 162. — IV. Some theorems on the linear stochastic model, 163. — V. Application to Walrasian and Marshallian stability, 164. —VI. Conclusion, 166.

IN A RECENT ARTICLE in this Journal, Brief and Owen [2] indicated how the coeffident of variation might formally enter into the evaluation of risky projects by considering the rate of return as a random variable. They use the coefficient of variation of the distribution of future cash flows as a measure of earnings risk and find a formal mechanism for relating the coefficient to risk in the world of uncertainty. However, if the distribution of future cash flows is asymmetrical, higher moments may have significant values. Thus, in the case of capital budgeting, skewness in the direction of undesirable returns, i.e., less than average, is particularly important in the evaluation of projects. Since Arditti [1] concluded"that the second and third moments of the probability distribution are reasonable risk measures," Brief and Owen's model can be extended to include the third moment. Defining C as the cost of capital, X as the net cash flows before deducting C, r as the rate of return on cost, and s as the rate of return on net cash flows, we have

The purpose of this paper is to investigate in detail the long-run supply responses of capital and their implications for the classical propositions. We focus on the behavior of a two-country model in which the long-run rate of interest in each country is fixed, for example, by the pure rate of time preference in the case of "rational" savings behavior, or by the savings behavior of capitalists if workers save nothing. After setting up the basic model in Section I, and analyzing the pre-trade equilibrium in Section II, we investigate the long-run free-trade equilibrium in Section III. In Section IV, we show that, because the high interest rate (high time preference) country is willing to trade future consumption for present consumption with the low interest rate country, it always has a lower long-run consumption with free trade than pre-trade, and conversely for the low interest rate economy. In Section V, the patterns of specialization are investigated. Section VI considers the effects of trade policy on the long-run equilibrium; it is shown that a tariff (export subsidy) may lead to a higher consumption per capita in both countries. Section VII considers some extensions of the analysis. In the Appendix, the nature of the dynamic path is analyzed.