Knowledge that Transforms

IN A TYPICAL Leontief model, there is a unique method of production for each product. Hence, if a given bill of final goods is specified, the output of each industry is uniquely determined, there being no possibilities of substitution. Professor Chenery, in a contribution to a study of the industrial structure of the Italian economy ([1], Chapter II, Section E), has considered a model more general in that each commodity may be either produced domestically by a unique process or imported, which involves a drain on foreign exchange. Some, at least, of the domestic industries operate under capacity limitations. There are then alternative ways of producing a given bill of goods; choice among them is to be made on the basis of minimizing the cost of imports in foreign currency. One would expect that the choice of production and import program would depend upon the relative prices of imports. The procedure actually used by Chenery is, however, independent of these prices. The purpose of the present note is to demonstrate that his procedure is correct under a wide variety of circumstances, i.e., that in spite of the presence of a substitution possibility, the optimal choice is independent of relative prices.