Knowledge that Transforms

THIS paper reports the results of a statistical study of the elasticity of foreign demand for Canadian exports. It sprang from the desire to obtain some criterion of the effect on export receipts of altering the exchange value of the Canadian dollar. Attention was centered on merchandise exports since, aside from Chang's attempts to measure the elasticity of the world demand for Canada's exports,' very little work seems to have been done on the export side. The Department of Trade and Commerce has made estimates of the Canadian import elasticities but it regularly treats exports as an exogenous factor in its models of the Canadian economy. This study was conducted intermittently during the last six years. During this time many different approaches to the subject were made.2 The results of what seem to be the most fruitful approach attempted so far are presented here, with only occasional references to previous attempts. This last approach is based primarily upon the statistical work of Schultz, Stone, and Horner, and the contributions to the pure theory of demand of Knight and Friedman. An attempt has been made to fashion the statistical approach so that the concepts we attempt to measure coincide as closely as practicable to the theoretically ideal ones. The first section of the paper deals with some fundamental general considerations which influenced the decision as to what statistical techniques to adopt. Sections II and III summarize the statistical findings and the last takes up some qualifications.

THE proposition that a tax-financed change in expediture will lead to an equal change in income has been subjected to critical examination in two recent articles.' Both emphasize that the proposition, which has been christened the budget applies only when certain conditions are fulfilled, and they dismiss it as a special case of little interest because of the restrictive character of these conditions. There is undoubtedly a danger that conclusions drawn from simplified models will be applied beyond the context in which they are valid and will be invested with the aura of universal truths. By defining and calling attention to the limitations on the validity of the balanced budget theorem, the articles cited serve as a useful corrective against this danger in this case. There is, however, some danger that in two respects they may be the source of confusion rather than clarification. In the first place, they concentrate attention on the limitations of the balanced budget theorem in such a way that the reader may easily lose sight of its essential core of truth. Second, they may create a somewhat inaccurate impression as to the exact location of those limits. The first danger is discussed in the succeeding paragraphs; the second in the later portions of the present paper. It may well be that the balanced budget theorem has little direct application to the world of reality because the necessary preconditions to its validity are rarely fulfilled in that world. Nevertheless, it does not follow that the theorem is completely uninteresting and that it provides no insight whatever into the real world. In order to recognize its role in the evolution of income theory, it is only necessary to recall that, until the balanced budget theorem was advanced, it was generally believed that, under exactly the same general conditions that are assumed in the development of the theorem, a change in expenditures balanced by a change in taxes had no effect on income whatever. That is, it was believed that the multiplier for a balanced budget was zero. Whatever its limitations, the balanced budget theorem represents an important refinement of this earlier view. That view followed from the assumption (or impression) that taxes could be treated simply as deductions from expenditure. In the balanced budget analysis, it was recognized that, while expenditures (on currently produced domestic goods and services) generate income directly, taxes do not directly reduce expenditure and income. Instead, they reduce the flow of funds available either for spending or nonspending. If this flow is subject to further leakages (after the taxes have been paid), such as through saving, the distinction becomes significant. The balanced budget theorem can best be regarded as a corollary of this treatment of taxes. In a still more refined analysis, it is true, the effect upon spending of different kinds of taxes would be distinguished (and the substitution effect as well as the income effects of taxes might be considered, as Baumol and Peston have suggested). Nevertheless, it remains true that the first step was to introduce taxes explicitly as a distinct entity in the analysis and to formulate some hypothesis, however simple, as to their effect on the flow of income. Turvey has pointed out that, in his model, the balanced budget multiplier is unity when household saving is the only leakage.2 Does this mean, as he seems to imply, that the balanced budget multiplier will not be unity if there are any other leakages, or, to put it more precisely, if there are any dependent variables other than household saving and consumption? Here we must distinguish between taxes themselves and other variables. The case in which taxes are a dependent variable, assumed to be a function of income, is considered ' Ralph Turvey, Some Notes on Multiplier Theory, American Economic Review, xLm (June I953), 282-86; and W. J. Baumol and M. H. Peston, More on the Multiplier Effects of a Balanced Budget, American Economic Review, XLV (March I955), I40. 2 Turvey, loc. cit., 285-86.

Fredie A. Mehta, Price-Competition Between India, Japan, and the U.K. in the Indian Cotton Textile Market During the Nineteen-Thirties, The Review of Economics and Statistics, Vol. 39, No. 1 (Feb., 1957), pp. 75-78

Wisconsin state individual income tax data present an excellent opportunity for a detailed trend study of the changes in the dispersion of taxpayers' income over a long period. The available concept, net taxable income, which is income after deductions except federal income taxes but before exemptions, remained essentially constant in definition from I929 to I949. The minimum filing requirement, rate, and exemption schedules remained the same in this state which has a long heritage of income tax payments. These data are more nearly comparable over a long period and had a much lower filing requirement in 1929 than federal data. This situation makes it plausible to work within the intricate detail of small class intervals for incomes above $2,000 in comparing the income distribution for the year 1929 with that of I 949. The purpose of this study is to examine quantitatively how people in different income ranges lost or gained relatively in comparison with the average percentage increase in the twenty-year period and to state, with qualifications, how much more or less people would have made before federal taxes in 1949 than they did, had the distribution of income remained constant from I929 to I949 for different income ranges. Comparisions of distributions. Both the increase in population and per capita income are considered in accounting for the upward shift in the distribution during the period. The I949 population was I 15 per cent and the Department of Commerce I949 state per capita personal income was 200 per cent of that in I929. If the distribution of income had not changed, the I949 frequencies with incomes approximately double those in I929 should the frequencies of the I929 distribution increased by I5 per cent. The data for such an analysis are given in the accompanying table for individuals making over $i,8oo net taxable income in I929 and $3,600 in I949. It can be seen from the data that only in the income classes from $2,IOO-2,200 in I929 and $4,200-4,400 in I949 are there an equivalent number of returns' The disparity between the two distributions becomes relatively greater for rich income class groups. In an attempt to quantify the change in the concentration ratio or shape of the distribution from I929 to I949 for different segments of the distribution, the question arises how much income rose for different classes in the I929 distribution in the twentyyear period if it did not double. The simple expedient of determining where in the I949 distribution there are as many returns in a class whose class limits and class interval are a certain percentage of those of a I929 class with the same number of returns is used. An example is the class from $2,8002,900 in I929 which has a frequency equal to that from $4,860 to $5,040 in 1949. The best match class limit percentages for the various I929 classes is presented in the last column of the table, with three distinct groups appearing,

CONSUMPTION has been cast as both villain and hero in the 1948-49 recession in the United States. It has been asserted that a weakening of consumption was important in accounting for the downturn. R. A. Gordon cites the levelling off of consumer demand as one of several factors responsible for the downturn.1 D. Hamberg has suggested an underconsumptionist explanation of the downturn.2 Even C. A. Blyth who set out to prove that the most important cause of the I948-I949 recession was a substantial fall in fixed investment . felt compelled to state in his conclusions, I accept the view that a reduced rate of growth in consumption both domestically and in the export trade in I948 caused unplanned inventory accumulation, which induced a fall in production of certain nondurables and consumer durables.3 Further, it has been argued that it was the strength of consumption which at least in part accounted for the mildness of the I949 recession. R. Fels asserts that an upward shift in the consumption function occurred in I949 which, along with continuing high levels of autonomous investment and government expenditures, accounted for the mildness of the recession.4 R. A. Gordon had adopted a similar view earlier, both with respect to the mitigating effects of the maintenance of a high level of consumption and to the strength of autonomous investment and government expenditures, although he makes no explicit reference to a shift of the consumption function.5 Hamberg points to the secular rise in the consumption function, deferred consumer replacement demand, and high levels of autonomous investment as factors explaining why this recession failed to develop into a major downturn.6 Blyth cites the continued rise in consumption during I949 as one among several factors which modified the recession.7 Since consumption figures largely in explanations of the I948-49 cycle, and in fact appears called upon to play a dual role, it may be useful to direct careful inquiry into determining what influences prompted consumption to behave as it did.

Sidney E. Rolfe, Geoffrey Furness, The Impact of Changes in Tax Rates and Method of Collection on Effort: Some Empirical Observations, The Review of Economics and Statistics, Vol. 39, No. 4 (Nov., 1957), pp. 394-401

T HIS article is based on a milk supply adjustment study. A primary objective was to test the use of linear programming techniques on the problems of farmers: how useful it would be for telling farmers what production adjustments would pay in response to changes in technical and economic conditions. The empirical results illustrate particular extensions in the application of programming techniques, but, more important, the results are of interest from two viewpoints: first, they indicate profitable lines of change in production when facing a range of changes in conditions of factor supply, prices of labor, prices of milk, and technical possibilities. Second, they offer reasonable explanations of changes taking place in important sectors in the southern states. The data were drawn largely from dairy farms in the Piedmont areas of North Carolina, but the empirical results should also apply in general to the much larger Piedmont region of the South and, to a somewhat lesser extent, to the larger areas in which cotton and tobacco are major crops. Production of milk for fluid use increased rapidly on these farms in the North Carolina Piedmont areas between I949 and I954. Expansion of dairying was accompanied by certain changes: enlargement of smaller farms by the renting of additional land, an increase in production of pasture and hay, shifts from lower-producing breeds to the Holstein breed, elimination of cotton or tobacco on many of the dairy farms, reduction in labor supply, and an increase in use of tractors. Assumptions