Knowledge that Transforms

A LTHOUGH considerable progress has ,Albeen made analytically and empirically within the last few years in better understanding the factors that determine the commodity composition of a country's international trade, there still remain many unresolved questions. There is widespread agreement, however, that a simple two-factor (capital and labor) version of the Heckscher-Ohlin theory is inadequate. Such assumptions of this traditional theory as identical production functions among countries for identical commodities, the homogeneity of labor supplies, constant returns to scale, and the international immobility of productive factors seem to be sufficiently violated in the actual world so that relative proportions of capital and labor are but one of several factors influencing the commodity pattern of trade. Nevertheless, the simple factor proportions theory has not been thoroughly tested against the trade patterns of large numbers of countries.1 Perhaps the high proportion of seemingly paradoxical results from tests made on the trade of a limited number of countries is due to the nonrepresentativeness of the sample selected. The comparatively few country tests are also insufficient to indicate clearly just what the relative importance and degree of generality is of elements other than physical capital and labor as determinants of the commodity structure of trade, e.g., research effort providing technological leadership to a country and relative supplies of human capital. Another subject on which there is inadequate knowledge concerns the determinants of the commodity pattern of direct foreign investment. Are they the same as those that determine commodity trade? Moreover, what is the relationship between trade and direct foreign investment? The purpose of this paper is to present additional empirical findings that relate to these questions in the trade and investment area. More specifically, the value of capital per worker that is embodied in exports versus import-competing production is estimated for some 35 countries using capital/labor industry coefficients and sectoral input-output coefficients based, alternatively, on United States, European Economic Community (EEC), and Japanese production data. These direct and indirect factor content ratios are then compared with a measure of the relative capital/labor endowments ratios in the countries. Utilizing U.S. measures, the relative importance of human capital, economies of scale, and research and development activities is also ascertained. The analysis of direct foreign investment is based on U.S. data and consists of relating such industry characteristics as capital/ labor ratios, skill and educational levels and the height of tariffs and transportation costs that protect a domestic industry to the ratio of direct foreign investment to total investment in an industry.

A central proposition of industrial organization is that the size distribution of sellers is an important determinant of an industry's profitability. Numerous studies have explored -and generally confirmed-such a relationship, but virtually all have been subject to a serious and binding constraint. The lack of individual market share data has forced use of the simple sum of the four (or eight) largest shares, i.e., the concentration ratio, as the variable representing firm size distribution. Nothing in theory, however, predicts that exactly four firms are crucial to industry performance, and nothing implies that they are equally important, as is implicit in their simple summation. The availability of market share data for 19721 avoids the necessity of any such assumptions in this research. Instead, we begin by recognizing two fundamental and opposing forces within industries-the advantages of greater output control by leading firms, and the difficulty of agreement among more numerous firms. At least potentially, output control confers the power to set and enforce above-competitive prices for the benefit of the industry. Much depends, however, on who controls output, since the number of core' firms influences the strength of collusive or cooperative agreements (Scherer, 1970, pp. 183-186). Large numbers reduce the likelihood of agreement but, ceteris paribus, provide control over greater industry output. These factors are suggested in both theory and previous empirical work. Thus, the Cournot, Chamberlin (1933), and Stigler (1964) theories of oligopoly imply that fewness of firms, size disparity, and threshold levels of output control are crucial. Empirical testing has been limited by published concentration ratios but nonetheless has produced some relevant insights. The fourfirm concentration ratio proves to be more closely correlated with industry performance than the eight-firm or more inclusive versions (e.g.. Kilpatrick, 1967), suggesting the importance of quite small numbers. Various efforts to capture size inequality have demonstrated close associations with above-competitive profitability and can also be interpreted as emphasizing the role of the top few firms (Stigler, 1964; Miller, 1967; Mann, 1970; Kwoka, 1977). And a critical level of outpuit control often, but not always, seems to emerge in the vicinity of 50% for four firms (e.g., Rhoades and Cleaver, 1973; White, 1976). But much of interest about firm size distribution is inevitably obscured by the concentration ratio aggregate. In contrast, the present data permit detailed examination of the market share correlates of industry performance, casting light on the questions of what number of firms is too large for collusion and what amount of output control is 'sufficient for price-setting power. We shall demonstrate basic deficiencies of the conventional concentration ratio, complex roles for muiltiple shares in industry performance, and a greater overall importance for large-share firms than heretofore recognized.

The validity of the rational-expectations hypothesis as applied to prices in active auction markets has been extensively tested. Numerous investigators have analyzed an enormous amount of data using many different statistical techniques, and no serious departure from the predictions of the hypothesis has been found. Thus, there is very strong evidence in favor of the hypothesis. (Poole, 1976, p. 467)

[Excerpt] This paper presents new evidence on the determinants of place-to-place migration in the United States. For understanding the causes of differential migration rates into and out of labor markets, knowledge of place-to-place migration functions is of interest for a number of reasons. Given a thorough understanding of gross place-to-place flows, one can proceed to calculate net flows; the reverse, of course, is not possible. There are also other advantages of place-to-place studies: parallelism to microeconomic behavior, opportunity to investigate specific 'origin-destination match-ups, recognition of the number and location of alternative opportunities for persons residing in different origins, and exploration of possible asymmetries. Following a large body of economic literature, the analytical approach adopted regards migration as a form of human investment. Economic variables used in the empirical-work exhibit effects in the hypothesized direction and explain up to two-thirds of the variance in intermetropolitan migration rates. However, this high degree of explanatory power is achieved only for certain functional specifications involving particular independent variables. Thus, the empirical results confirm the usefulness of the human investment approach to place-to-place migration, but they show too that the economic factors used as explanatory variables must be carefully specified and measured.

Edgar L. Feige, Douglas K. Pearce, The Casual Causal Relationship Between Money and Income: Some Caveats for Time Series Analysis, The Review of Economics and Statistics, Vol. 61, No. 4 (Nov., 1979), pp. 521-533

T HE hypothesis that maximization underlies human behaviour is perhaps the most widely accepted paradigm among economists. Particularly in the study of consumer behaviour, numerous models have been built upon the hypothesis of maximization. Reviews of these models can inter alia be found in Houthakker (1961), Brown and Deaton (1972) and Barten (1977). The testing of the maximization hypothesis (HM) in real life situations appears to be a complicated affair. The main problem is that HM can only be tested conditional upon other assumptions. An individual's function' is commonly measured via the individual's observed behaviour. We call that indirect measurement. But the relationship between an individual' s and his behaviour is based on HM itself. Hence, having measured functions via HM it becomes difficult to use the measured to test HM. Therefore, testing HM mostly reduces to testing certain restrictions which have to be satisfied by parameters in a system of demand equations. However, testing these restrictions is not without problems, as testing a certain restriction has to take place conditional upon the validity of other restrictions.2 As far as testing has been carried out, results are not very encouraging (cf. Barten, 1977; Wales and Woodland, 1976). But, since many additional assumptions are involved,3 no firm conclusions can be drawn from these negative outcomes. Given these problems, several paths are open to the student of consumer behaviour. First he may want to dispense with the concept altogether and only hypothesize certain consistency properties of individual choices. This approach was taken by Samuelson (1938). If, however, the assumptions on individual preferences are made sufficiently strong, especially if one adopts the strong axiom of revealed preference, their implications for behaviour are equivalent to the restrictions derived from HM (cf. Houthakker, 1950; Stigum, 1973). Hence, testing the restrictions implied by the strong axiom of revealed preference is equivalent to testing HM. Empirical work in this area (cf. Koo, 1963; Mossin 1972) suggests that for everyday commodities (mainly food) most purchases of individual families are not inconsistent with the strong axiom of revealed preference theory. However, in many cases purchases are such that neither consistency nor inconsistency can be assessed (cf. Koo, 1963). Koo (1974) states that '6with few exceptions, almost all families made at least some inconsistent choices (p. 174). He finds that inconsistencies do not arise very often if purchases are in the neighbourhood of past experience. For less routine-like purchases inconsistencies are more likely to occur.4 Parenthetically, it may be mentioned that aggregate demand functions have a tendency to be in agreement with the strong axiom of reReceived for publication November 15, 1977. Revision accepted for publication November 16, 1978. * University of Southern California, Leyden University and Leyden University, respectively. The research reported in the paper is supported by grants from the Netherlands Organisation for the Advancement of Pure Research (ZWO) and the Dutch Ministry of Cultural Affairs, Recreation and Social Welfare. At the time of writing Arie Kapteyn was successively a fellow of the Netherlands Institute for Advanced Study in the Humanities and Social Sciences (NIAS) and at Leyden University. The empirical results are based on a survey, designed by B. M. S. van Praag, of members of the Dutch Consumer Union. Their willingness to make available the data for the study is gratefully acknowledged. We thank Floor van Herwaarden, Bernard van Praag, Roberto Wessels, and the referees for their helpful suggestions with respect to an earlier version. The research reported is part of the Leyden Income Evaluation Project. I Throughout the paper the term utility function will be used to denote the general concept, whereas the term welfare function will be used for the more narrowly defined concept introduced in section II. 2 In any case one has to specify functional forms for the demand equations. Even when using flexible forms (e.g., Christensen, Jorgenson, and Lau, 1975) the specification may be expected to affect the result. 3 For example, it is usually assumed that individuals have identical functions, or that an individual's parameters are not affected by consumption patterns of other individuals, that functions do not shift over time, etc. Moreover, estimation is often based on aggregate data. 4 The empirical investigations in the present paper are concerned with durables. Extrapolating Koo's findings we would expect HM to be violated relatively often for these expenditure categories, since durables are bought infrequently.

It is now widely accepted that predictions of such key quantities as imports, final demands, gross domestic output and employment depend crucially on a knowledge of the technology of an economy, and in particular of the input coefficients of the technology matrix. However, many investigations have pointed out that these coefficients change over time owing to alterations in the product mix at a sectoral level, changes in production techniques, relative price changes and economies of scale. Some econometric analysts have concentrated on relative price effects (Theil and Tilanus, 1964), and very few studies have considered the impact of product mix changes or economies of scale. Any analysis of the intertemporal behaviour of input-output coefficients requires a great deal of data, both on a time-series basis and with a uniform classification scheme. Such data are obviously very scarce, and as a consequence the attention of forecasters has shifted towards the incorporation of specialist technical information into the estimation of future coefficients. In common with earlier studies, this paper concentrates on the R.A.S. method of forecasting and examines an updating of the 1959 absorption flow matrices of nine European countries to the 1965 level of technology. The updated matrices, along with various derived quantities, are compared with the corresponding figures based on the actual 1965 tables at a 19-sector level of disaggregation. The data are prepared in a standardized framework by the Economic Commission for Europe (ECE) (1971) for twelve European countries for the year around 1959 and by the ECE data tape (1977) for nine European countries. The purpose of the ECE research programme was to make structural comparisons between various European countries. Data are obviously reduced from national tables to standardized tables following a homogeneous 19-sector scheme.

A study of how customers will respond to a tax based on miles per gallon indicates that the long-term effect on gasoline consumption could reduce crude oil imports by 27 percent. When demand elasticity of gasoline is broken down into the price elasticity of demand minus the price elasticity of demand for fuel mileage, it is learned that the short-term miles per gallon factor is larger than previously thought. Adjustments in the stock of automobiles to those providing better gas mileage is indicated by a 20 percent increase in miles per gallon with an additional 40 percent gasoline tax. 20 references.