Substitution possibilities between imports and traditional factors of production for a small open economy

Abstract

The article examines the possibility of imported inputs acting as a separate factor of production, along with the traditional factors of labor and capital, in Barbados. The production technology is assumed to be approximated by a translog cost function relating the overall production cost to the input prices. From the cost function, the derived cost shares of the inputs together with the revenue shares for traded and nontraded output are estimated using Zellner's iterative estimation process. The existence of separability between inputs and outputs could not be accepted, implying that factor demand in Barbados is sensitive to changes in the output mix. The results also suggest that there exist positive substitution possibilities between imported inputs and the primary factors of production.