Knowledge that Transforms

PROFESSOR Frisch shows that an adverse balance of payments can be met with less reduction to the aggregate volume of trade by discriminatory rather than non-discriminatory import restrictions.2 In his argument for his plan, Frisch seems to have overlooked a case where in the short run the nature of demand of a deficit country, say B, for goods such as staple foodstuffs and basic raw materials fromn a surplus country, say A, may be such that there is a floor of B's imports from A. The issue depends largely upon (i) the possible sources of supply in countries other than A. If A does not represent the rest of the world but is only one country among many countries trading with B, it is improbable that B has to import a fixed amount from A. B's requirements for, say, cotton may be very rigid, but its requirements for cotton from any one source, such as A, may be flexible. (2) It is possible that B may produce most kinds, if not all, of the goods which she imports from A. In such a case, the reduction of A's goods will cause B to expand the output of these goods. These two considerations together make it unlikely that B has to import a specified quantity from the depressed country A. But if A represents not one country alone but a large portion of the countries in depression, there would be a rigidity of B's requirement for goods from A, and a restoration of the balanced situation would call for a reduction of trade between B and C, and the aggregate trade under discriminatory restriction would be little more than that under non-discriminatory restriction. Herein really lies an important weakness of Professor Frisch's scheme; because at a time when there is a large section of the world under depression, which is the time when the need for preserving the volume of trade is most pressing, discriminatory restriction will not achieve any noticeably better result than non-discriminatory restriction. Nor can it prevent a rigidity of requirements of certain countries for imports as a result of the propagation of depression to a large part of the world.

IN recent years several attempts have beeni made to set up macro-econometric models for the United States and to derive statistical estimates of relevant parameters for the prewar period.1 To the knowledge of the present author few, if any, attempts have been made to deal statistically with econometric models using postwar data. There are good reasons for this. In the first place if annual data are used, too few observations will be available for an adequate statistical analysis. If monthly or quarterly data are utilized, then difficult problems arise, for example the treatment of seasonal variation and the possibility of substantial correlation of disturbances. In spite of these latter difficulties an attempt is made in the present paper to analyze statistically a very simple econometric model for the United States using quarterly national income data for the period I947-50. The statistical analysis is admittedly weak at certain points and must therefore be regarded as preliminary and tentative. In addition to the difficulties mentioned above the problem of multicollinearity 2 is present, as is usually the case in multiple correlation studies involving economnic data. All of this means, of course. that the regression coefficients tend to be rather uncertain and that therefore the estimates of the structural parameters must be interpreted with caution.