Price response of the production and import structure — An econometric analysis, FRG 1954–1967

Abstract

The purpose of this paper is to analyse for sectoral industries the responsiveness of the production structure to price changes for domestic and imported goods, and for competitive imports. Under the assumption of cost-minimizing behaviour a sector can either rearrange factors of production for producing its output at home, or he can reduce the production by importing the competitive final product. Instead of characterizing the technology by a homogeneous production function in the quantities of intermediate goods, capital, labor and imports, we choose the unit cost function in the prices of the inputs. By using Shephard's Lemma we obtain a system of cost-minimizing input- and import coefficients as functions of the prices which account for substitution possibilities and changes in technology over time. For purposes of econometric estimation we choose translog unit cost functions and translog price aggregator functions. Our empirical results are based on yearly input-output tables and import matrices in current and constant prices for the Federal Republic of Germany for the periode 1954–1967.