Shifts In Relative Prices Research Articles

Diagnosing the UK productivity slowdown: which sectors matter and why?

AbstractThis paper explores the slowdown in labour productivity growth in the UK and other advanced economies by decomposing its growth into contributions from different sectors of the economy, looking at both within‐industry productivity growth and labour reallocation between sectors. We find that the within‐industry contribution is the main source of the slowdown. Comparing trends pre‐ and post‐2008, the aggregate productivity slowdown can be attributed largely to the manufacturing sector and the information and communication (ICT) sector. Disaggregating further, the UK productivity growth slowdown can be attributed mainly to transport equipment and pharmaceuticals within manufacturing, and computer software and telecommunications within ICT. Strikingly, these are advanced, high value‐added sectors considered to be strengths of the UK economy. Looking across other advanced economies, our results confirm that manufacturing and ICT sectors are the main drivers of the slowdown, to differing degrees. Part of the explanation for the slowdown in in these sectors may relate to the underlying question of how to construct deflators for a modern economy when technological and structural changes are leading to large relative price shifts. The structure and supply chains of the key slowdown sectors also merit further investigation.

Interest rates affect public expenditure growth

<abstract> <p>The aim of this paper is to analyze interest rates and public spending to provide policy implications. Concretely, it explores the influence of these rates on public expenditure growth as opposite to the traditional direction view, dealing with 216 countries for the 1972–2021 period and estimating system GMM models. A balanced subsample is used for assessing Granger causality through a recent panel technique. The results are robust for the used dependent and target variables and also the methodology. They show that decreasing interest rates are associated with—and in some cases also lead to—lower per capita public expenditure growth. These results can be interpreted as a twofold effect of shifts in relative prices—through fiscal illusion—and of crowding out of private investment with respect to the public sector.</p> </abstract>

Boosting affordable housing supply: Could type approval of serially produced housing be a\xa0piece in the puzzle?

The housing shortage has become a major political concern in Sweden and Germany. To ease tension on housing markets, both the Swedish and German central governments aim to extend housing supply and have highlighted type approval of multi-family housing as an important concept in the provision of affordable housing.The article outlines the role of serial housing construction in a historical as well as a contemporary setting, and describes the roles of agents and institutional prerequisites related to housing policy, urban planning and building permission in the two countries. The comparative data is analysed using theories on institutional change, with the aim of tentatively explaining why and how institutional change evolves.Results show that shifts in relative prices, technology and preferences are driving reform. Although the major agents (central governments, states, municipalities and developers) have different motives for supporting or working against reform, a majority of agents are acting in favour of reform. It is concluded that it is probable that type approval of multi-family housing will be introduced in both countries. However, the time for negotiations on the scope of reform between agents involved is expected to be shorter in Sweden than in Germany, due to Sweden’s fewer layers of government and a stronger set of decisive agents. Once an agreement has been reached, reform is expected to be quicker in Germany than in Sweden as legal text and an assessment institution already exist.

Will Brexit speed a seismic shift in UK trade patterns?

The UK's trade pattern has shifted significantly away from the EU since the 1990s. Our analysis suggests that this shift will continue in the decades to come, with the EU share in UK goods exports potentially slipping to around 35% by 2035. Shifts in relative prices from moves in tariff and especially non‐tariff barriers could lower the share further. Over 60% of UK goods exports went to the EU in the late 1990s but this has fallen to around 45%. Slow EU growth is partly to blame, with UK exports to the EU barely expanding since 2007. But our analysis also shows that a 1% rise in EU GDP leads to only around half the rise in UK exports to the EU that a 1% rise in GDP in the rest of the world induces in UK exports to non‐EU countries. Based on our findings and OE forecasts of long‐term growth in the EU and the world, the EU share of UK goods exports could fall to 37% by 2035 and around 30% by 2050 – back to its 1960 level. The share of services exports to the EU has held up better but is lower than for goods, at around 40%. Weakening growth of UK exports to the EU has taken place despite the development of the EU single market since the early 1990s. Indeed, based on our projections UK goods exports to the single market could drop below 5% of UK GDP by 2050. These projections make no allowance for Brexit effects, but the declining importance of exports to the EU single market could colour prospective Brexit negotiations. Simple income‐based projections of potential country shares in future UK exports suggest a further swing towards emerging countries (EM) in the decades ahead, especially China and India. Exports to EM could approach 40% of the total by 2035. A shift in the pattern of trade preferences and restrictions faced by the UK post‐Brexit could spark even larger shifts in the structure of UK exports.

Comment 2 on ‘Agricultural Adjustment’ by Edwards and Bates

A contention in this Comment is that agricultural economists have had more influence than Bates and Edwards (2016) seem to admit. Also, it seems reasonable to take a broader view of adjustment than just adjustment policy as there have been many changes in Australian agriculture, analysed and debated by agricultural economists, that have impacted on the ways in which adjustment has occurred. However, as Edwards and Bates note, structural change in the farm sector is subject to many forces other than agricultural policy change and there are other major economic forces including human capital development, technological change and relative price shifts that bring about changes in the structure of agriculture. A brief search of some parliamentary documents relating to agricultural adjustment and a scan of the references clearly reflect the fact that many Australian agricultural economists have been involved and have contributed to the ideas relating to agricultural adjustment (e.g. Harris et al. 1974; Wilkinson 1999). Further, it does not take long to find agricultural economists who have led and contributed to major reviews of many industry policies that have had adjustment consequences, for example the McColl (1988) Royal Commission into Grain Storage, Handling and Transport, reviews of the wool industry, reviews of the dairy industry (Drane and Edwards 1961) and many others even more recently. Of course, the impact on agricultural adjustment is difficult to assess, but the input efforts have been significant. Also, general deregulation in agriculture has had impacts on farm size and farm numbers in addition to the direct changes in agricultural adjustment policies. Many agricultural economists, far too numerous to list, from academia, government and the private sector including farmer groups, have contributed to deregulation. Another major impact of agricultural economists has been through ABARES and the former Bureau of Agricultural Economics, and the Productivity Commission and its predecessors. The impact in both cases is direct through ministerial briefings and other advice provided to government organisations and the information provided to the public more generally. Many agricultural economists have been involved in these organisations. A number of high-profile agricultural economists with great influence over agricultural policy at various points in their careers have impacted agricultural adjustment policies – Sir John Crawford and his role in the formation of the Industries Assistance Commission (Parker 1987), the considerable number of directors of the BAE, ABARE and ABARES, John Kerin as Minister for Primary Industries, Geoff Miller as Secretary of the Department of Primary Industries (and Energy) and the many agricultural economists in leadership roles in State Departments of Agriculture. Difficult to measure and hard to draw a direct connection to agricultural adjustment is the contribution of academics in agricultural economics. Training in applied analysis has provided the human resources and technical support for many of the analyses, reviews and policy developments that have occurred in relation to agricultural adjustment. This is a somewhat hidden contribution but provides a background that has strengthened the rational analysis of many policies. Then, there is the role of those publishing in the Australian Journal of Agricultural and Resource Economics and the related journal, the Review of Marketing and Agricultural Economics, where there has been a significant number of contributions, many referred to by Bates and Edwards. It is thus reasonable to conclude that agricultural economists have played a significant role in the area of agricultural adjustment when measured against the counterfactual position of not having agricultural economists contributing to the area.

Distributional and welfare effects of Germany’s year 2000 tax reform: the context of savings and portfolio choice

This paper empirically investigates distributional and welfare effects of Germany’s year 2000 tax reform in the context of the household savings decision and the allocation of wealth to a portfolio of assets. The reform is simulated in an ex ante behavioural microsimulation approach. Behavioural responses resulting from changes in capital income taxation are estimated in an empirical demand model for household savings and asset allocation, which is applied to German survey data. Significant reductions in tax rates result in income gains for most of the households. Gains are found to be greater for households in higher tax brackets, whereby income inequality increases, in particular in East Germany. Moreover, households increase savings and alter the structure of asset demand as a result of shifts in relative asset prices. As a result, utility losses reduce welfare effects for almost all households, in particular for households with greater savings.

Conventional and Insidious Macroeconomic Balance-Sheet Crises

This paper describes the anatomy of two types of balance-sheet macroeconomic crises. Conventional balance-sheet crises are triggered by external imbalances and balance sheet vulnerabilities. They typically occur after capital inflows have led to a substantial build up of foreign currency exposure. Insidious crises are triggered by internal imbalances and balance sheet vulnerabilities. They occur in high-growth economies when an initially equilibrating shift in relative prices and resources and credit in favor of the nontraded sector overshoots equilibrium. The paper argues that policymakers are now better able to forestall conventional crises, but they are much less capable of early detection and avoidance of insidious crises.

Conventional and Insidious Macroeconomic Balance-Sheet Crises

This paper describes the anatomy of two types of balance-sheet macroeconomic crises. Conventional balance-sheet crises are triggered by external imbalances and balance sheet vulnerabilities. They typically occur after capital inflows have led to a substantial build up of foreign currency exposure. Insidious crises are triggered by internal imbalances and balance sheet vulnerabilities. They occur in high-growth economies when an initially equilibrating shift in relative prices and resources and credit in favor of the nontraded sector overshoots equilibrium. The paper argues that policymakers are now better able to forestall conventional crises, but they are much less capable of early detection and avoidance of insidious crises.

The impact of the Single Farm Payments on the expenditure on fertilizers and crop protection inputs: a comparative study of the Italian agriculture

Abstract The Mid Term Review (MTR) of the European Common Agricultural Policy (CAP) in 2003 sped up the process of policy reforms toward decoupled payments in order to urge agricultural production to respond to market signals. However, since the elimination of coupled subsidies could produce a shift in commodity relative prices and decoupled payments could generate “coupled” effects on production, it remains questionable how Single Farm Payment (SFP) alters agricultural intensification. Therefore, through a comparative statistical analysis applied on Italian FADN regional data, this article aims at evaluating whether the MTR had positive impacts on the aggregate expenditure on fertilizers and crop protection inputs. From the results, it is observed that the expansion of profitable crops like vegetables, flowers, and vineyards, along with the receipt of SFP increased the expenditure of fertilizers and crop protection inputs. Such findings suggest that the MTR has been so far effective in terms of aligning ...

The factor income distribution in China: 1978–2007

This paper investigates changes in aggregate labor share in China during 1978 and 2007 with a particular focus on the 1995–2007 period during which official statistics report a drop of 12.45 percentage points in labor's share of national income (labor share). Our main findings are: (1) The reported fall in aggregate labor share is overstated. According to the official statistics released by the NBS (2007a), the labor share fell 5.25 percentage points from 2003 to 2004. However this dramatic decline, 42.16% of the total reported decline of the labor share from 1995 to 2007, is completely due to the changes in the way NBS break down the operating surplus state-owned and collective-owned farms and the mixed income of the owners of individual economy; (2) For the last three decades, two main forces have been driving shifts in the aggregate labor share: (i) structural transformation between the agriculture and non-agriculture sectors and (ii) shifts in the labor share within the industry sector; (3) From 1995 to 2003, these two effects are both negative and together drive down aggregate labor share by 5.48 percentage points. The structural change explains 61.31% of the decline and the remaining 38.69% of the decline is due to the changes in the labor share within sectors, primarily in the industry sector; (4) Labor share in agriculture is lower than labor share in services. Therefore, when the service sector grows relative to the agriculture sector in the economy, the aggregate labor share of income declines; and (5) Restructuring of the SOEs and expanded monopoly power are the main reasons for the decline of labor share within industry after 1998. Relative price shifts, the factor input ratio, and biased technological progress are all insignificant forces for this decline because the substitution between factors in the industry sector is nearly unit elastic.

Commentary on Gregory Tassey’s “Rationales and mechanisms for revitalizing US manufacturing R&D strategies”

Greg Tassey’s new paper pulls together and augments a number of themes and recommendations that he has espoused and championed over the past decade. During that period, he has been an unabashed critic of the ‘‘vast majority of economists in the United States’’ who espouse a ‘‘neoclassical economic philosophy’’ that is ‘‘inaccurate,’’ because of dependence on outdated views of comparative advantage based upon shifts in relative prices. Of most concern to Tassey, who is chief economist of the Commerce Department’s National Institute of Standards and Technology, is an alleged indifference to allowing industrial technology ‘‘to offshore in response to trends in comparative advantage’’ and the lack of policies to maintain ‘‘a viable domestic-based manufacturing capability.’’ Indeed, though he alludes to the necessity for more broad-based economic growth models, Tassey does not provide such a comprehensive alternative: rather, the bulk of the paper is concerned with one (quite important) component of economic growth: technology policy, as a subset of broader R&D and innovation policy. He argues for a new public–private paradigm in this area that will create policies to manage the ‘‘entire technology life cycle,’’ including all major elements of domestic and global supply chains. Implicit in his critique of current ‘‘neoclassical’’ economics is a deep-seated skepticism of the effects of globalization, particularly the impact of outward foreign direct investment (FDI) by US multinational companies, and—most important—the movement to locate R&D facilities outside the United States. The paper underscores repeatedly the purported danger from the fact that R&D investment by US multinationals outside the country is growing at three times the rate of domestic R&D investment. ‘‘This trend needs to be reversed,’’ he argues. In the brief space allotted for this comment on the paper, I will not be able to pass judgment on all of the facts and arguments advanced in the dense and detailed analysis. Indeed, one preliminary note on presentation would be that the paper could have been cut by at least half in order to sharpen Tassey’s most important points. I found a slide presentation of the paper a good deal more cogently argued. In any case, whatever my

Rationales and mechanisms for revitalizing US manufacturing R&D strategies

The race to economic superiority is increasingly occurring on a global scale. Competitors from different countries are employing new types of growth strategies in attempts to win that race. The United States cannot, therefore, continue to rely on outdated economic growth strategies, which include an inability to understand the complexity of the typical industrial technology and the synergies among tiers in high-tech supply chains. In this context, a detailed rationale is provided for maintaining a viable domestic technology-based manufacturing capability. In the United States, the still dominant neoclassical economic philosophy is at best ambivalent on the issue of whether a technology-based economy should attempt to remain competitive in manufacturing or let this sector continue to offshore in response to trends in comparative advantage, as revealed through shifts in relative prices. The paper argues that the neoclassical view is inaccurate and that a new innovation model is required to guide economic growth policy. Specifically, the paper provides (1) a rationale for why an advanced economy such as the United States needs a manufacturing sector; (2) examples of the process of deterioration of competitive positions for individual industries and, more important, entire high-tech supply chains; (3) an explanation of the inadequacy of current economic models for rationalizing needed new policy strategies; and (4) a new economic framework for determining both policy mechanisms and targets for those mechanisms, with emphasis on the systems nature of modern technologies and the consequent requirement for public–private innovation ecosystems to develop and deliver these technologies. Several targets are suggested for major policy mechanisms.

Distributional and Welfare Effects of Germany's Year 2000 Tax Reform

This paper empirically investigates distributional and welfare effects of Germany's year 2000 income tax reform. The reform is simulated in an ex-ante behavioral microsimulation approach. Dead weight loss of changes in capital income taxation is estimated in a structural model for household savings and asset demand applied to German survey data. Significant reductions in tax rates result in income gains for most of the households. Gains are found greater for households in higher tax brackets, whereby income inequality increases, slightly greater in East- than in West-Germany. Moreover, households increase savings and alter the structure of asset demand as a result of shifts in relative asset prices. As a consequence, utility losses reduce welfare effects for almost all households.

The Canadian Manufacturing Sector: Adapting to Challenges

This paper examines the challenges that the manufacturing sector has faced over the last half century - focusing on both long- and short-term performance. It first examines whether there is evidence that this sector is in long-term decline. The paper also investigates how the industry has responded to specific shocks during this period - from exchange-rate movements, trade liberalization and business cycles. It finds little evidence of long-term decline. Rather, it describes how manufacturing has adapted to varying challenges, whether from demand shifts due to business cycles, relative price shifts associated with exchange rate shocks or changes in tariff regimes.

Canadian and U.S. Real Income Growth Pre and Post 2000: A Reversal of Fortunes

Evaluations of an economy's economic performance are often made using a measure of real gross domestic product (GDP) per capita, which represents the average remuneration (labour income plus capital services) that an economy generates through domestic production. Because real GDP is a constant dollar measure of the remuneration to capital and labour in an economy, it does not account for who owns the capital, how much of it is used up through production or how relative price shifts affect the volume of goods and services that can be purchased.Modifications can be made to traditional estimates of GDP to account for these factors. This paper examines the performance of the Canadian economy using alternate measures - gross domestic income, gross national income and net national income. The paper also examines the relative performance of the Canadian and U.S. economies using standard GDP measures and these alternate measures. The comparison spans the period from 1980 to 2006, but focuses on the 2002-to-2006 period. During these latter years, changes in commodity prices, manufactured goods prices, the exchange rate, international investment income and capital consumption have all contributed importantly to real income growth in Canada.As a result, a very different picture of relative performance of the Canadian and U.S. economies emerges when an aggregate income measure is used that accounts for relative price changes, international income flows and capital consumption than when real GDP is used. From 2002 to 2006, U.S. real GDP per capita grew 9.3% while Canadian GDP per capita rose 7.0%, making it appear that the U.S. economy was outperforming the Canadian economy. However, once changes in resource prices and the exchange rate, international investment income and capital consumption are taken into account, real income per capita in the United States increased by 8.6%, which is similar to its GDP per capita growth. However, the Canadian adjusted measure of real income per capita growth rose 15.6%, more than twice the per capita real GDP growth in Canada and nearly double the U.S. rate.In contrast, the difference between the two economies was exactly the opposite in the period from 1980 to 2000 - when commodity prices were falling, when the exchange rate was not appreciating and when outward flows of income to foreigners were increasing relative to the income paid to Canadians. During this period, when consideration is given to these factors, real income measures in Canada were falling relative to those in the United States.

Exchange Rate Cycles and Canada - U.S. Manufacturing Prices

The paper examines the industry characteristics that are related to the shifts in competitiveness, measured as the relative common-currency price ratios between Canadian and US manufacturing prices. We find that relative input costs and relative productivity growth are the two most important factors influencing changes in relative Canada/US prices. Competitive pressures emanating from trade are important determinants of the extent to which relative productivity differences are passed through to cross-country relative prices. We also find that the magnitude of domestic market competition and export intensity affects the short-run relative price shifts over the cycle of exchange rate.

Lasting Impacts of Indonesia’s Financial Crisis

We study the poverty impacts over time and space of Indonesia’s severe economy‐wide crisis of 1998, using 10 large national surveys spanning 1993–2002. On allowing for shifts in relative prices stemming from the crisis, we find a sharp but geographically uneven increase in the poverty rate in 1998, reflecting both the unevenness in the extent of the economic contraction and the differing initial conditions at the local level. Our counterfactual analyses indicate geographically diverse recovery rates 4 years later. Proportionate impacts on the poverty rate in both 1998 and 2002 were greater in initially better‐off and less unequal districts. In the aggregate, a large share—possibly half—of the poverty count in 2002 is attributed to the 1998 crisis.

Exchange Rate Cycles and Canada/US Manufacturing Prices

The paper examines the industry characteristics that are related to the shifts in competitiveness, measured as the relative common-currency price ratios between Canadian and US manufacturing prices. We find that relative input costs and relative productivity growth are the two most important factors influencing changes in relative Canada/US prices. Competitive pressures emanating from trade are important determinants of the extent to which relative productivity differences are passed through to cross-country relative prices. We also find that the magnitude of domestic market competition and export intensity affects the short-run relative price shifts over the cycle of exchange rate.

On the Relevance and Nature of Regional Inflation Differentials: The Case of Spain

This paper studies two aspects of the behaviour of provincial relative prices in Spain: the relevance and the nature of provincial inflation divergences and relative price shifts. Inflation differentials are found to be small (the range is less than half point per year in the long-run), but deviations of relative prices from equilibrium can be very persistent. Relative price shifts turn out to be determined by characteristics which are intrinsic to very deep economic integration, in particular, price and wage mechanisms which operate at the national level. This is in stark contrast to evidence on the determinants of real exchange rates among countries; as a consequence, the Balassa-Samuelson hypothesis results clearly rejected. Therefore, while admiting that inflation differentials among EMU participants are possible, their nature will be different from those existing among Spanish provinces.

Prices and Economic Change in Medieval Sweden

The article explores relative price changes in medieval Sweden, with a focus on grain, beer, salt, oxen, butter, wax and iron. Supplementary data are provided on copper and hops. Most of these goods declined substantially in price relative to grain. The magnitude of the relative price shifts reflects technological and organisational change. Price cuts tended to be larger for goods that possessed a high knowledge content, such as iron, copper, and beer, or were involved in a more efficiently organised international trade, such as salt. This parallels the notion that north-western Europe, at least from the sixteenth century, developed a distinctive pattern of relative prices, with low prices of industrial goods and high prices of food. It is striking that Sweden, a peripheral economy of medieval Europe, exhibits these traits even before the sixteenth century. The great expansion of the European economy of the early modern period appears as a continuation of the innovations of the late medieval era.