Knowledge that Transforms

Production Function, this REVIEW 57 (May 1975a), 243-244. , Real Money Balances as a Variable in the Production Function, The Journal of Money, Credit and Banking 7 (Nov. 1975b), 535-544. Ramsey, James B., Classical Model Selection Through Error Tests, in Paul Zarembka (ed.), Frontiers of Econometrics (New York: Academic Press, Inc., 1974). Ramsey, James B., and Paul Zarembka, Specification Error Tests and Alternative Functional Forms of the Aggregate Productions, Journal of the American Statistical Association 66 (Sept. 1971), 471-477. Sinai, Allen, and Houston H. Stokes, Real Money Balances: An Omitted Variable from the Production Function? this REVIEW 54 (Aug. 1972), 290-296. Real Money Balances: An Omitted Variable from the Production Function?-A Reply, this REVIEW 57 (May 1975), 247-251. Zarembka, Paul, Transformation of Variables in Econometrics, in Paul Zarembka (ed.), Frontiers of Econometrics (New York: Academic Press, Inc., 1974).

THE extent of suboptimal capacity, that is, the of industry output produced in suboptimal plants (SUBQ hereafter) is a very important aspect of market performance, particularly for a small country like Canada. However, only a very few studies have attempted to estimate SUBQ and investigate its causes. These studies have considered the influence of some of the traditional elements of market structure on SUBQ. Weiss' (1964) preliminary study tried to demonstrate that the survivor technique could be used to obtain reasonably acceptable estimates of SUBQ. But, he did not investigate its causes beyond showing that it was negatively related to concentration. Eastman and Stykolt (1967, ch. 3) estimated SUBQ in 16 Canadian industries from their engineering estimates of minimum efficient scale (MES). They hypothesized the percentage entry barrier, the capital requirement entry barrier, the degree of product differentiation and industry growth rate as its determinants, and found the effect barrier to be important. They also found the capital requirement barrier to be significantly correlated with SUBQ, though it turned out to be insignificant in the multiple regressions due to its collinearity with the effect barrier. Their study is an important initial contribution and remains the only work relating to Canada so far; but, it is difficult to generalise their findings due to the small size of their sample. Duetsch (1973) again used the survivor technique to estimate SUBQ in about 100 U.S. industries and found it to be significantly dependent upon concentration, effect entry barrier and industry growth. More recently, Weiss (1976) has made some new estimates of MES (based on interviews and questionnaires) and SUBQ for 16 U.S. industries. He considered and found concentration ratio, industry size relative to MES, steepness of average cost curve and geographic market size as the important determinants of SUBQ. However, as will be clear from what follows, all these studies have ignored many other important factors that may be expected to influence SUBQ. Finally, Scherer et al. (1975, ch. 3) have attempted to explain the ratio of actual average plant size of the largest plants accounting for half of industry output to their engineering estimates of MES in 12 industries across 6 nations. Although it is hard to interpret this ratio as a measure of inefficiency arising from the prevalence of suboptimal capacity, some of their hypotheses and discussions throw a good deal of light on the determinants of SUBQ. This brief survey of the literature clearly indicates that there is a need for further research in this area. In addition to the traditional elements of market structure mentioned above, the role of international trade and foreign direct investment in influencing domestic market performance has recently been brought out,' and it must be considered in any study of market performance. Besides, factors like market size which determine the extent of plant specialization should also be taken into account in a study pertaining to suboptimal capacity. All these factors seem to be particularly relevant for a small and open economy like Canada's, where the extent of foreign ownership of industries is also quite substantial. The purpose of this paper is to specify a model of suboptimal capacity by taking into consideration these factors as well and to test their significance in an empirical estimation of the model on the basis of data from a fairly large sample of Canadian manufacturing industries. As far as the task of estimating SUBQ is concerned, it depends on estimating MES first. The comparative merits and demerits of the survivor, statistical and engineering techniques of estimatReceived for publication May 1, 1978. Revision accepted for publication November 28, 1978. * Panjab University. The author is indebted to M. A. Fuss, T. A. Wilson, L. Waverman and two anonymous referees for their valuable comments and suggestions. I See Caves (1974a, 1974c). Eastman and Stykolt (1967) also emphasised the role of international trade in this context, but they did not explicitly test the relevant hypotheses in their model of suboptimal capacity.

SINCE the end of World War II, the Japanese economy has attained a rapid economic growth, and the necessary capital funds have been procured through personal savings rather than through forced savings via taxes or inflation. One of the remarkable phenomena is the more or less steady rise in the personal savings ratio, particularly in urban worker households. The savings ratio of urban workers rose from 2.0% in 1951 to 19% in the 1960s. Contrary to the expectation that the savings ratio in urban worker households would be stabilized, it kept increasing in the 1970s and reached 24% in 1974. This rate of 24% in 1974 is much higher than those of the other OECD countries, which range from England's 8% to West Germany's 15%. A puz'zling phenomenon in the 1970s is that the savings ratio increased as inflationary pressure mounted. After the oil crisis of 1973, for example, the savings ratio jumped by 1.7 points in 1974 under double digit inflation. Why has the savings ratio continued to increase? Does a conventional savings function explain it? Answers to these questions have serious implications for macroeconomic policies since if the high savings ratio is sustained when the Japanese economy enters a period of slower growth, one might observe excess liquidity. Furthermore, if it is found that the savings ratio is positively correlated with inflation rates, then personal income tax cuts to stimulate sagging consumption may lose effectiveness if the inflation rate is not controlled. The present paper attempts to answer the following two questions: (1) does a conventional savings function explain the urban worker household's savings behavior in the sixties and seventies? and (2) if not, what would explain the puzzling rise of personal savings ratio in the seventies? Attempts to explain Japanese savings (or consumption) have been numerous: Blumenthal (1970), Shinohara (1959, 1962, 1970a,b), Komiya (1966), Mizoguchi (1970), Noda (1970) and Yoshihara (1972), among others, have attempted analyses. Many of these studies applied the conventional consumption functions of the relative income, permanent income and life-cycle hypotheses. Among the various studies we first examine Shinohara's savings function. We apply two tests: a Bayesian test of parameter shift, and an ex post forecasting test. The Bayesian shift test was applied after the Chow test failed mainly due to the fact that one of the crucial assumptions necessary to conduct the Chow test does not seem to hold for our data. In contrast to previous studies, a recent study by Sato (1976) argues that the savings behavior of urban worker households reflects the endogenous socio-economic motivations to save. To answer question (2) above, therefore, we sharpen Sato' s formulation to explicitly introduce those variables that reflect socio-economic motivations for savings. The organization of the paper is as follows: in section II, after a brief survey of some studies of the Japanese savings function, we examine the validity of Shinohara's formulation in the sixties and in the seventies by the Chow test and a Bayesian test of parameter shift. In addition to Shinohara's formulation we shall examine the applicability of a Houthakker-Taylor (1970) type dynamic savings function and compare it to Swamy' s (1968) application to international data (one of the countries studied there is Japan). In section III, Sato's formulation (1976) is modified and estimated using time series as well as cross section data. The modified Sato formulation is compared to the Houthakker-Taylor formulation. Section IV gives concluding remarks and possible policy implications of the findings. Received for publication July 7, 1977. Revision accepted for publication March 22, 1978. * University of Pennsylvania. I am grateful to Professor Hiroki Tsurumi of Rutgers College for suggestions and encouragement, and also to anonymous referees of this REVIEW whose comments improved the paper. Responsibility for any remaining error is of course mine.

QINCE the 1930s an unresolved controversy among economists has centered around the connection between market power and fluctuations. After presenting some theoretical arguments relating to this controversy and briefly examining a few previous studies, this paper will address the empirical question of the link between market structure and the stability of employment. By controlling for differences in worker characteristics, the effects of industry variables on instability will be revealed. A few secondary, yet interesting, aspects of this study deserve mention at this point. Data on individual workers, from the University of Michigan's Panel Study of Income Dynamics, will be combined with industry data. Not only will these individual data control for worker differences across industries; they will also permit an examination of the importance of personal characteristics in determining patterns of employment. Another aspect, to be discussed later, is the ambiguity in the meaning of employment instability, particularly on the micro level. Instead of arbitrarily picking one empirical measure, three alternative measures are proposed and used in the empirical work; this allows for a more complete analysis of the effects of both personal and industry variables on the individual's experience. Section II presents a discussion of possible theoretical links between market power and employment. A few previous empirical studies are described in section III. The empirical model used in this study will be described in section IV, including a description of the data sources and variable definitions. The results are presented in section V, and some concluding remarks are given in section VI.

Although considerable attention has been directed in the last few years to the -effects of capital inflows on saving behavior in less developed countries (see, for example, Weisskopf (1972), Papanek (1972)), relatively little work has been done on the implications of this research for economic growth. Even if domestic saving is reduced by flows, one may legitimately ask, with Grinols and Bhagwati (1976, p. 416), How much does this matter? Grinols and Bhagwati's answer to this question is relatively optimistic: It is certainly possible for the usual, static, adverse impact of external capital to be eliminated quickly by a growing economy receiving the capital (p. 429). In this note I will argue that sustained adverse effects from external capital become quite likely when Grinols and Bhagwati's work is extended. With data from Puerto Rico I will show that the analytical conclusions are empirically relevant. Grinols and Bhagwati look at an interesting but limited case, that in which aid increases by a constant amount once and for all; their conclusions are weakened when the analysis is extended to growing aid streams. Their analysis can also be extended to bring out the implications of dependence on aid for return flows of profit and interest. Although it is not entirely clear from their article, Grinols and Bhagwati define aid as grants plus net capital inflows less net factor income outflows (profit, interest, royalties, etc.). In lumping together the net capital inflows and the current account factor income outflows (which inevitably follow dependence on external saving), they have removed from consideration the relationship between these flows. They have also ignored the distinction between GDP (the output produced within the country) and GNP (the income received by local residents). Net capital inflows can lead to a growing ratio of net external debt to the capital stock and therefore to a growing gap between output and income. In the note that follows, refers to grants plus the net capital inflow alone. (In fact, grants may be seen either as negligible or as fixed in proportion to the net capital inflow.) The return to aid-profit and interest-is considered separately and explicitly. The extensions to Grinols and Bhagwati's work are incorporated into a simple model which is solved analytically. The analysis leads to the conclusion that dependence can indeed be a more persistent phenomenon than Grinols and Bhagwati imply. The Model

Tham V. Truong, Dennis N. Gash, Less-Developed Countries' Taxable Capacity and Economic Integration: A Cross-Sectional Analysis, The Review of Economics and Statistics, Vol. 61, No. 2 (May, 1979), pp. 312-316

Steven W. Kohlhagen, Testing for the Role of Speculation in the Forward Exchange Market: Some Problems if There are Fisherian Expectations, The Review of Economics and Statistics, Vol. 61, No. 4 (Nov., 1979), pp. 608-610

Thomas Mayer, A Comparison of Unemployment Rates and Income Fluctuations Prior to the Great Depression and in the Postwar Period, The Review of Economics and Statistics, Vol. 61, No. 1 (Feb., 1979), pp. 142-146