Price Assumptions Research Articles

The Causes of Real Exchange Rate Variability: A Heretic View from the Interwar Period

Historically, real exchange rate variability has been higher under flexible than under fixed exchange rates. Two explanations have been put forward. The neo-Keynesian view focuses on the interaction of volatile nominal exchange rates with sticky prices. The neoclassical approach maintains the flexible price assumption and regards an increased incidence of real shocks as the culprit. Using spectral decomposition, we examine the evidence on sticky prices for the interwar period. Prices and exchange rates are found to be equally flexible, contrary to the sticky price view and consistent with the instantaneous equilibrium approach.

Returns to scale, adjustment costs and the optimal investment of the mining firm

This paper analyses the optimal investment programme of a competitive mining firm for two different technologies and capital adjustment costs. In the first part the case of a variable proportions technology with decreasing returns to scale is studied, and it is concluded that under the assumption of a constant mineral price, a first stage in the exploitation period of the deposit will occur in which capital stock is increasing. In the second part, the optimal investment programme is determined when there are constant returns to scale and Hotelling's rule governs the dynamics of the mineral price.

Ecological sustainability and environmental control

The concept of ecological sustainability requires that at least some stocks of environmental assets be prevented from rising above or falling below certain threshold levels. This paper considers the implications of this requirement in the context of a general model of environmental control, paying particular attention to the informational and structural conditions that are necessary and sufficient to satisfy the requirement. These conditions turn out to be particularly stringent, and will not ordinarily be satisfied. The paper then considers the scope for achieving the goal of ecological sustainability when the system is not controllable through economic incentives, implying that prices are inadequate observers of environmental processes. It argues the merits of a policy of environmental stabilization based on direct observation of the physical system, in which ecological sustainability is assured through the imposition of physical restrictions on economic activity so as to avoid breaching the critical thresholds. Since the price assumptions of the model are very weak, the results are robust with respect to a range of economic theories of price.

Producer price dispersion, real output, and the analysis of production

For many years, economists have successfully analyzed aggregate production data using the single price assumption to construct real output. However, economists using these same techniques to examine firm and establishment level data have had difficulty interpreting the ensuing results. This paper explores whether price dispersion across individual producers could explain these problems. Using data from the hydraulic cement industry, this paper shows that omitting individual prices introduces measurement errors in real output that are correlated with factor prices. These errors lead to biased estimates of the production function and productivity growth equations. A method of simultaneously estimating real output and price is introduced to overcome these problems.

Multiple Use of Public Rangeland: Antelope and Stocker Cattle in Wyoming

The government must manage public rangeland in the face of alternative interests, including wildlife and domestic livestock production. The objectives of this study were to estimate a production possibilities frontier for antelope (Antilocapra americana (Ord)) and stocker cattle on the Wyoming Red Desert and then evaluate the most economical combination for the specific production and price assumptions used in the analysis. Nine antelope-steer combinations were derived by using a linear programming model to maximize total number of animals subject to annual forage production on a representative 405-ha range site. The resulting 9 combinations included 72 head of antelope with no steers at one extreme and 35 head of stocker steers with no antelope at the other extreme, with various combinations of each in between. Because of the different forage preferences of antelope (primarily browse) and cattle (primarily grass), the marginal rates of substitution of cattle for antelope varied widely along the production possibilities frontier. Specifically, the marginal rate of substitution of cattle for antelope was very low moving from 72 antelope-0 steers, to 69 antelope-29 steers, in terms of sacrificing only a few antelope (3) in exchange for a comparatively large number of steers (29). Conversely, the marginal rate of substitution of cattle for antelope moving from 69 antelope-29 steers, to 0 antelope-35 steers was very high in terms of sacrificing a relatively large number of antelope (69) in exchange for only a few additional steers (6). This wide range of substitution rates suggests that economic benefits from antelope and cattle would have to be extremely different before multiple use is not preferred in the case study setting.

The exchange rate and the price level in a small open economy: Botswana

How valid is the small open economy pricing assumption in a genuinely small open economy? This article first considers the extend and speed of pass-through of foreign price and exchange rate changes to domestic prices for the case of a classics small open economy: Botswana. The evidence, in contrast with the evidence of incomplete pass-through for large industrial countries, is that 100% of foreign price level and exchange rate changes pass through to the Botswana price level. The pass-through is not instantaneous. Adjustment has a half-life of about 15 months. The empirical results are then used to model the effect of alternative exchange rate policies—fixed exchange rate, gradual change, and discrete change—on inflation and on the real exchange rate. Because of the lag in pass-through of exchange rate changes, there is a trade off between the competitive position and imported inflation.

Chapter II. The World Economy

The start of hostilities in the Gulf in January appears to have removed some of the uncertainties surrounding the oil market, and oil prices have dropped to around 20 dollars per barrel. This development should help sustain growth and reduce inflation over the next two years. Box A sets out some calculations of the effects of the change in our oil price assumptions on our forecast. The appreciation of the D-Mark bloc and the emergence of a recession in the US driven by a wave of bank failures has persuaded us to be less optimistic then we were in our last forecast. Table 1 summarises the outlook. We are forecasting a slowdown in the rate of growth in the major economies in 1991, with some recovery in 1992 and thereafter. The slowdown has already taken place in the US, the UK and Canada, whereas in 1990 Japanese and German growth was at historically high levels. Chart 1 plots levels of capacity utilisation in the major economies. Only in the US has output clearly fallen below capacity, but record levels of utilisation in Japan, Germany and France inevitably imply some slowdown in growth from recent levels.

Thirlwall's Law and balance of payments constrained growth: further comment on the debate

This paper reviews the debate that has occurred in Applied Economics over Thirlwall's Law (McCombie, 1989; McGregor and Swales, 1985; 1986; Thirlwall, 1986). The empired evidence concering the validity of the Law is re-assessed using a variety of tests including that suggested by McCombie (1989) and the new data set provided by Bairam (1988). The Law is overwhelmingly rejected by the evidence, contrary to the conclusions of McCombie and Bairam. The rationale for the assumption of constant relative prices which is required to derive Thirlwall's Law is reconsidered. The original ‘law of one price’ rationale renders the approach incoherent. The more recent rationale of sticky oligopolistic price improves the internal consistency of the model but necessitates consideration of non-price competition. However, neither the theory underlying Thirlwall's Law, nor empirical tests of the Law, property account for this. In principle, the Law cannot be employed to distinguish between demanding constrained and supply-co...

Do house prices rise that much? A dissenting view

Abstract The debate over the social significance of home ownership partly rests on the ‘house price assumption’ — the notion that house prices rise consistently above general inflation rates and benefit all owners. However, these theoretical claims rest on sparse empirical evidence and are beset by measurement difficulties. This article attempts to measure real house prices (ie adjusted for inflation) and pure house prices (ie adjusted also for quality and quantity changes) for Britain since the mid 1960s. Comparisons are also made with high and low price regions in Britain and with four other north European countries. Results suggest that real and, even more, pure price gains are not assured, that price falls are as significant as price rises, and that over the long term gains may be low and even ephemeral. Short term booms and slumps may distribute gains and corresponding losses between owner occupiers, but this redistribution is likely to be socially random. These results therefore support criticism of the ‘housing sector cleavage’ model.

An inventory model under inflation for stock dependent consumption rate items

Under inflation the assumption of constant unit price is not valid. The tendency in inflationary environment is to buy more in order to reduce the total system cost, which may be true in certain situations but it is not true when consumption rate of items is dependent on initial stock level since buying more quantity under inflationary environment leads to more consumption resulting in higher total system cost. The model developed in this paper helps to determine optimum ordering quantity for stock dependent consumption rate items under inflationary environment with infinite replenishment rate without permitting shortages. The results are illustrated with a numerical example.

Real Wages over the Business Cycle: A Band Spectrum Approach

This paper presents new evidence on the cyclical relationship between real wages and aggregate employment. As is well known, models that attribute fluctuations in output to movements in aggregate demand and retain the assumption of flexible product prices (the ADPF hypothesis) imply countercyclical real wage movements as employment adjusts along a downward sloping aggregate demand for labor schedule. In contrast, real business cycle theories [10; 15; 13] suggest procyclical movements as workers substitute work for leisure along dynamic labor supply schedules. The empirical evidence on these propositions remains mixed. Some influential studies report a negative relationship [4; 5; 25;], others report a positive relationship [2; 12; 18] and Geary and Kennan (GK 7] to identify the purely business cycle correlation and distinguish it from correlations at very high and very low frequencies. The frequency domain decomposition provides a simple framework for reconciling the conflicting conclusions of previous studies and for focusing attention on the business cycle relationship. I show that the highly significant (positive or negative) correlations reported in previous studies are attributable to variations at frequencies far too high or far too low to be associated with the business cycle. The true business cycle relationship is quite different from that revealed by simple regressions of real wages on employment. I find a weak but statistically significant, negative relationship over business cycle frequencies for the post-war U.S. data when wages are deflated by the Producer Price Index (PPI). The negative relationship is particularly strong over the subperiod 1947-70 but becomes weak and insignificant over the last sixteen years 1971-86. This finding is consistent with the widely held belief that in the former period cyclical movements in employment were determined by changes in aggregate demand while real shocks dominated in the 1970s. However, when wages are deflated by the Consumer Price Index (CPI), the business cycle relationship is weak and not statistically significant over both subperiods. These results contrast sharply with those of previous studies that do not isolate business cycle components.

Complementarity and substitutability in family members' time allocated to household production activities

This study reviews the concepts of complementarity and substitutability and the theoretical representations of these concepts used in demand analysis. It highlights difficulties encountered in empirical estimation of these relationships in the absence of adequate price data. A procedure for investigating these relationships in demand analysis under the assumption of constant relative prices is proposed. A model is formulated to test these relationships in family members' time allocated to household production activities. The data used in this analysis were collected in the Interstate Regional Research Project (NE-113), U.S.D.A. A simultaneous regression procedure is used. Results indicate that time of homemakers and their spouses are weakly complementary in several household maintenance activities, unpaid work, eating, shopping, recreation, organizational participation, physical and non-physical care of family members, and physical care of self. Homemaker's time in food preparation and spouse's time in physical care of self are found to be weakly substitutable. Relationships of substitutability are identified for each family member individually in his/her own discretionary activities. Discussion centers on implications of the model assumptions and use of residual analysis in applications other than demand analysis.

Eor in Western Europe : Status and Outlook

More than sixty EOR projects implemented on the onshore oil fields of Western European countries have been taken into consideration. They cover most of the EOR processes, except the CO2 miscible drive, and several of them have been technically and economically successful. The full list of these projects is given, together with a brief description of six of the most significant among them. The conclusions which can be drawn from the publications on this Western Europe EOR experience are that steam injection remains the most efficient process for very viscous oils. The area of its applicability is the same as that found in other countries of the world, plus a successful extension to heterogeneous fissured reservoirs. Polymer injection in moderately viscous oils is confirmed to be very efficient, provided that improvements in stability of the viscous solution can be obtained. These two processes are the most promising ones on a relatively short term in Western Europe onshore. Considering horizontal drilling as an improved oil recovery technique, some experiences have been gained recently in this method. Since 1980, thirteen horizontal wells have been drilled in Western European oil fields, without taking into account the North Sea area. The first results are quite encouraging, mainly thanks to remarkable improvements in drilling performances. An investigation of the oil potential for EOR shows that 40 to 170 Mm3 of additional oil could be recovered from the currently producing onshore fields in Europe by polymer flooding and up to 75 Mm3 by steam drive, given a favorable oil price assumption. Injection of various gases, under miscible or immiscible conditions, has a theoretical potential that could reach the same magnitude as thermal and polymer processes. However the availability of gas required at cheap conditions makes the development of these reserves improbable. Orientations for research coming from this investigation are in favor of an improvement of the polymer characteristics to ensure and extend their stability over a wider chemical and physical environment. For thermal and gas injection processes, it seems justified to continue efforts to develop foaming agents to reduce instabilities. For longer-term processes such as surfactants, besides some continued efforts still going on to reduce retention of current products, hopes should be placed in possible future development of new, more efficient and cheaper chemicals. Likewise, synergy between horizontal well technique and EOR processes may be expected to raise improved oil recovery to a higher level in the future.

Intermediation Under Trade Restrictions

Intermediation is the activity of buying and selling simultaneously in one market. In this paper intermediation in the market for an arbitrary good is derived from trade restrictions in a general equilibrium exchange model. The trade restrictions are given by a trade feasibility relation defined on the set of households, and they necessitate dropping the one price assumption of standard general equilibrium theory. It is shown that in this setting equilibria need not exist in spite of well-behaved preferences and fully flexible prices. As a special case a simple economy with a linear market structure is analyzed in detail.

The impact of energy prices on Alberta's economic outlook

This paper examines the impact of alternate world oil price assumptions on the long-term economic outlook for Alberta, as determined by a provincial econometric model. Under each of three oil price scenarios, three distinct future periods are identified for the main oil producing region in Canada, ie Alberta. The first period exhibits a recession versus expansion in the economy and a complete divergence in real GDP between the upper and lower oil price scenarios. However, this GDP gap is reduced by the end of the second period as all scenarios tend to converge. Although the GDP is varied among the different scenarios, the last period is seen to require diversification away from energy industries in order to sustain healthy growth. The study results suggest that, due to the limited life index of conventional oil and gas reserves and projected slow growth in long-term oil prices, the provincial government should encourage the development of non-conventional resources or implementa comprehensive policy of industrial diversification towards non-resource based industries in the current period.

Hutt's views on money

AbstractW. H. Hutt did not accept Keynesian assumptions of rigid prices. Nor did he concur that the level of demand for money and credit could impact on the role of prices as a co‐ordinating mechanism. He did, however, distinguish between real money and money units (nominal money) and what he called ‘moneyed demand’, the rate of expenditure of money units similiar to Keynes's ‘effective demand’. Banks were dealers in money who could dilute or condense it, thus impacting on the general price level. Banks sacrifice yield if they are not fully loaned‐up, but this does not imply that fractional reserve banking leads to inflation. Absent convertability into a commodity standard, however, that is given government suspension of convertability inflation is then inevitable unless a strict policy of money neutrality is followed by the authorities. The implementation of such a rule is difficult, and while price flexibility would have accomplished the necessary adjustments, Hutt had not progressed towards today's theories of expectations, which might have made his views more tenable at the time of writing.

Investment and Disinvestment Principles with Nonconstant Prices and Varying Firm Size Applied to Beef‐Breeding Herds: Comment

Optimal investment and disinvestment principles have received considerable attention in both general and agricultural economics for over two centuries. Notable are the works of Faustmann, Samuelson (1937), Hirschleifer, Burt, and Perrin which establish the basic replacement principle. Recently, Trapp presented a reformulation of this basic replacement principle by relaxing the assumptions of constant prices and firm size. The purpose of this comment is to discuss a possible misinterpretation of the replacement principle underlying Trapp's model. Specifically, the link between Trapp's article and previous literature is established with the hope of clarifying any misunderstandings of optimal investment principles. Trapp states that his equations (3) and (4), which are derived from the discrete time form of the net present value formula for a single asset, constitute the appropriate addition and culling [investment and disinvestment] decision for a firm with nonconstant size (Trapp, p. 694). This formulation is analogous to Perrin's equation (2), which maximizes the returns from an asset over a single rotation. In contrast, Chavas, Kliebenstein, and Crenshaw present the asset replacement decision as an optimal control problem with an infinite planning horizon. Transversality conditions for optimal asset rotation as given in Chavas, Kliebenstein, and Crenshaw's equation (12) correspond to Perrin's equation (4.2), which maximizes the returns from an asset over an infinite horizon. Reid and Bradford, in an investigation of investment and disinvestment in farm machinery, also derive optimal rotation criteria analogous to Perrin's formulation. Thus, it appears that an inconsistency exists in the Journal associated with the appropriate replacement rule when expansion and contraction of an operation is endogenously determined. Should replacement rules be derived from an infinite horizon specification or from a single asset specification? The merits of an investment decision must be based not only on earnings from the next production period but also on the rents which can be extracted from the firm's fixed factors. Failure to consider future assets in a replacement decision implies that changes in replacement costs have absolutely no effect on the optimal life of assets up to the point where it is no longer profitable to operate. Specifically, maximizing over a single asset rotation corresponds to maximizing the internal rate of return of an investment decision with a discount rate quivalent to the internal rate of return (Samuelson 1976). The quantitative effects of considering only a single asset specification are minimal depending on the length of the asset rotation and the discount rate employed. As the rotation length increases or a larger discount rate is employed, representation of the optimal replacement rule will converge to Perrin's equation (2) (Samuelson 1976). The turnpike theorem states that if the asset rotation is of sufficient length where the end of the horizon has o influence on period decisions, the system then converges towards the von Neumann path (Boussard). Too short a length may result in the system never converging toward the von Neumann path. Alternatively, if the salvage and acquisition values are equal at any point in time, then the von Neumann path will be reached at the beginning of the last period. However, in general, asset replacement is costly; and, thus, access to the von Neumann path is not instantaneous. The apparent inconsistent use of a single-asset specification in contrast to basic replacement principles associated with an infinite horizon may be resolved by investigating the theoretical results in Chavas and Klemme. Employing an optimal control methodology with a finite planning horizon, T, a distinction among rules derived from alternative specifications is evident. Using Perrin's terminology, Chavas and Klemme generalize the replacement criteria for a system with multiple constraints

An integrated energy planning model for Illinois

An integrated energy supply and demand model for the state of Illinois is described. This equilibrium model is an important tool for integrating information from a variety of planning studies and data bases. A wide range of energy issues affecting diverse areas of the energy system, such as Illinois coal production under alternate oil price assumptions, renewable energy resource potential, and conservation options, can be analyzed by using the model.

The Impact of $(US)15 Oil Prices on Canadian Energy Markets

This paper uses a long-run model of Canadian energy supplies and demands to assess the effects of a long period of low oil prices on the Canadian oil industry. The model is solved under a 'high' price assumption, a 'low' price assumption and a 'low' price with a form of government intervention, and the results are

The potential of enhanced oil recovery

This paper presents results of a comprehensive analysis of enhanced oil recovery (EOR) potential in the United States for the rest of this century and beyond with respect to potential production rates and ultimate oil recovery. The analysis is based on a resource database consisting of over 2500 reservoirs with approximately 325 billion barrels of the original oil in place and considers two technology cases: a base economic case and an advanced technology case, both with variable oil price assumptions and discounted cash flow rate of return. The results are presented in graphical form and include EOR potential in the United States in terms of ultimate oil recovery and production rate to the year 2013 for each major EOR group of technologies and under varying economic and technological scenarios. The main conclusion of the study indicates that EOR could increase the current domestic crude reserves by approximately 40 per cent for the base case and nearly double the production rate for the implemented technology case.