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This article studies the optimality in international borrowing and lending. This paper also examines the determinants of international lending and provides some economic explanations for the results. The author presents arguments that the risk of national as well as individual default must be considered in international lending. The measure of this argument is the ratio of national debt to the total capital stock. In this assumption, the author suggest that national accumulation is beneficial and that it raises national income both directly and indirectly through its effects on foreign investment and debt service payments.

This paper focuses on the use of endogenous variables in dynamic models of investment. Section I explains how the theory of the firm's investment in physical capital is frequently conceptualized and discussed. Section II discusses some of the approaches which have been used to define desired capital stock in terms of variables which are at least partially endogenous to the firm. This section also contains an elementary example which illustrates that definitions of desired capital stock involving such endogenous variables are not consistent with profit maximization and as a result can lead to prediction errors in dynamic models. In Section III the results of Section II are extended to a more sophisticated version of the investment model which Jorgenson and others have developed and applied in recent years. Section IV contains a brief review of the rational distributed lag schemes which have generally been used as adjustment mechanisms in investment studies and indicates the conditions under which these may represent optimal adjustment paths. Section V applies the lag schemes developed in Section IV to obtain some comparative simulations of models in which desired capital stock has been correctly and incorrectly defined. Section VI contains some comments on estimation and prediction, and Section VII concludes with some suggestions as to how the problems raised by this paper may be avoided.

The paper is concerned with testing an application of a theory of investment behavior based on the neo-classical theory of optimal capital accumulation. The demand for capital is determined to maximize net worth under the neo-classical conditions of production. With the assumption of a lag in the completion of investment projects, gross investment is a distributed lag function of period-to-period changes in desired capital stock. The investment process is divided into a series of separate stages, the first stage being a change in the demand for capital services, intermediate stages being for letting contracts, and so on, and the final stage the actual investment expenditure. To extend the theory to include anticipated investment expenditures, these are treated as a special kind of intermediate stage. The purposes of the paper are to test hypotheses about the internal structure of the investment process when viewed in this way, and to investigate whether forecasting actual investment expenditures by treating the investment process in this way can improve upon the method used by the OBE-SEC. [ABSTRACT FROM AUTHOR]

This article analyzes the forecasting and policy implications of five alternative models of the forces motivating spending on business investment in the U.S. in from 1972 through early 1973. The generalized accelerator model is based generally on the acceleration principle, which postulates a linear relationship between net investment and changes in output. The model has developed as a general distributed lag relationship involving both changes in and level of output, along with the level of the existing capacity or capital stock. A variety of theoretical considerations have been presented for focusing on profits or cash flow as a determinant of business investment. Current and past profits may be thought of as a good proxy for future profit expectations, which in turn determine investment. Several theories focus on the market value of a firm as a determinant of its investment. James Tobin has argued that if managers seek to maximize the market value of their corporations, they will add to their fixed capital goods whenever the marginal addition to the firm's market value exceeds the cost of the goods. Dale Jorgenson has developed and applied several closely related models of investment behavior based on his version of the neoclassical theory of optimal capital accumulation. A somewhat different version of the neoclassical model is used in the Federal Reserve-MIT-Pennsylvania (FMP) econometric model. The FMP model treats equipment and construction asymmetrically.

In particular, it can be argued that the rate of technical progress will be influenced by some aspect of an economy's investment activity. It may be influenced by the rate of growth of the capital stock,[2] or the share of the National Product invested, or the period of time over which the capital stock is replaced, or the accumulated sum of past investment.[3] Technical progress will be endogenous to the processes analysed by growth models rather than something which is exogenous to those processes in so far as the rate of technical progress depends upon investment. In this paper the reasons for expecting a positive relationship between the rate of investment and the rate of technical progress will be analysed. [ABSTRACT FROM AUTHOR]

A variety of theories have been proposed to explain both the pattern and magnitude of U.S. direct foreign investment. One approach has been to explain direct foreign investment in terms of host country characteristics such as Gross National Product (GNP), rate of growth of GNP, trade barriers and convertibility of currency. In a recent issue of the journal "The American Economic Review," Anthony Scaperlanda and Lawrence Mauer (S-M) adopt this approach in an effort to specify the determinants of U.S. direct investment in the European Economic Community (EEC) over the period 1952-66. S-M find that only the size of the EEC market is a significant variable in explaining U.S. direct investment flows. In contrast this paper contends that the investment/size-of-market relationship that S-M test is theoretically questionable and that investment can be largely explained not by the size of the EEC market but by the growth of that market. This article specifies a model based on the hypotheses proposed by S-M. The model is also applied to U.S. direct investment in the EEC and the empirical results are discussed. Then it evaluates the S-M model and their empirical tests and compares their findings to those presented in the article.

The purpose of this paper was to reconcile the income-investment accelerator with the neoclassical theory of the competitive firm. The essence of the accelerator is that the firm behaves as if output were a datum to which it must adjust its demands for inputs. The essential problem is to rationalize such behavior, which, in the conventional neoclassical model, appears to be inconsistent with profit maximization. My approach was to consider a phenomenon which the conventional neoclassical model implicitly rules out-the existence of excess supply in the output market. Such excess supply imposes upon the representative firm a demand-determined constraint upon sales, which effectively fixes its level of output. The above analysis considered the maximization of the present value of the future stream of returns to the firm's owners first without and then with this constraint. In both cases, optimal investment policy involves gradual adjustment of the firm's capital stock to a target value. In the former conventional neoclassical case, the firm takes only prices as given and simultaneously chooses optimal time paths for output supply and input demands, so that the one cannot be considered a function of the other. In contrast, in the latter case, when the demand-imposed constraint on sales is effective, output becomes a datum, and the target capital stock becomes an increasing function of the level of output, as well as of prices. Within this latter context, assuming expectations about future levels of the demand-imposed constraint on output to be static, gradual capital stock adjustment implies a gradual accelerator. Investment demand asymptotically approaches a multiple of the rate of growth of output. The more rapid is the adjustment of the capital stock, the more rapidly is the full accelerator effect approached. [ABSTRACT FROM AUTHOR]

The acceleration principle, in a relatively strong form, may be taken to relate to the proposition that, with a linear homogenous production function and constant factor proportions, the elasticity of capital stock with respect to output is unity. Empirical findings, however, have suggested that this elasticity is less than unity and, in all but the extremely long run, very substantially less than unity. Put another way, the data have indicated that, for example, a 10 per cent increase in sales would generate in a reasonably short period an amount of investment equal to no more than 1 or 2 per cent of capital stock and would even after a period of five or six years generate an investment equal to no more than 4 or 5 percent of capital stock. Permanent acceleration hypothesis implies that firms will invest to the extent that they believe increases in demand are permanent. Hence, for given increases in sales, investment will be less the greater the proportions of the increases which are deemed transitory. As to the role of profits, the small positive over-all and mean within-group coefficients may lend some comfort to the views of those who argue that if not the total at least the timing of investment or its distribution among firms is partially influenced by recent or current profits.

The use of aggregate production functions of the Cobb-Douglas type to explain the sources of growth and of differences in growth rates, in recent years among eight European countries and the United States is discussed in the article. Output is related to inputs of labor and capital, together with a residual not accounted for by these factor inputs, whether measured conventionally or in efficiency units. Until recently such procedures, when applied to European countries, required the use of balance-sheet data to measure capital, but ignorance of prices and valuation methods implicit in such data has been a serious weakness. Thanks mainly to the enterprise of economists Simon Kuznets, Moses Abramovitz and their co-workers, supported by the Social Science Research Council, historical series on gross investment have recently become available for some European countries. Despite uncertainties surrounding deflation procedures and the paucity of data for estimating useful lives, such capital estimates are greatly to be preferred to figures resting on balance sheet valuations. The availability of these new data prompted the present study, preliminary results of which are given in this paper.

The article discusses the relevance of the assumptions and accuracy of the conclusions of neoclassical theory of investment by Dale W. Jorgenson. The role of relative prices, the critical element in the neo-classical approach, is not confirmed. The elasticity of capital stock with respect to the ratios of the wholesale price index to Jorgenson's measures of the rental price of capital is far below the value of unity which he has assumed in his papers. Unconstrained estimates of the long-run elasticity of capital stock with respect to the product of relative prices and output, which are also far less than unity, suggest errors in Jorgenson's desired capital stock variables introduced by misspecification of the role of relative prices. The elasticity of capital stock with respect to output is reasonably high, in a number of instances approaching unity. Conclusions by Jorgenson and James A. Stephenson suggesting a delay of up to a year before the response of investment to changes in its determinants are found to follow from the constraints which they impose upon the lag distribution, and are contradicted by relatively free estimates from the data.

The article comments on the article "The New View of Investment: A New Classical Analysis," by Edmund S. Phelps, published in the November 1962 issue of the "Quarterly Journal of Economics." It informs that it has been suggested by a number of writers that if part or all of technical progress requires to be embodied in new machines, a rise in the propensity to save may contribute to raising the level of output not only by raising the capital/labor ratio on machines of a given vintage but also by lowering the average age of machines, thus increasing the proportion of the capital stock that embodies the latest technology at any time. The article aims to show that on the type of assumptions used by Phelps this conclusion is valid in an economically significant sense only if the elasticity of substitution between labor and capital is equal to unity (as it is in his model). Phelps offers a proof that the average age of the machines in existence under steady growth depends only on the rate of growth and the rate of depredation.

The article presents an analysis of the neoclassical view of investment. It provides the basis of investment pessimism and provides an analysis of investment and productivity in long and short run. In the new view, the role of investment is to modernize as well as deepen the capital stock. Now investment is prized as the carrier of technological progress. A once-for-all rise in the investment ratio can significantly modernize the capital stock only temporarily. Ultimately the average age or modernity of capital must settle back toward its equilibrium level. A permanent modernization of the capital stock starting from equilibrium would require the investment ratio to increase without limit, a policy that is not feasible without foreign assistance at any rate. Of course, actual economies are never found in dynamic longing equilibrium because of fluctuations in investment. An upswing in investment is usually associated with a downswing in the mean age of capital.

The purpose of this paper is to investigate the effect on the optimal accumulation policy of introducing the rigidity of non-shiftable capital into a two-sector neoclassical model. In this way, we take some account of the fact that there is considerably more flexibility in planning the allocation of new capital goods than of old capital goods that have already been designed and installed. We assume that newly produced capital goods are assigned to a particular industry and may not be shifted to another industry at a later time. The policies of primary interest to the development planner are those that start from low initial capital endowments. When both capital stocks are below their long-run optimal levels, the first stage of the optimal policy involves directing the entire flow of investment to the capital-goods industry. The capital stock in the consumption-goods industry is allowed to depreciate, but does not remain idle (as it would for the time-optimal policy) since some labor is used with it to produce consumption goods. Thus, excepting the case where the initial capital stock in the consumption-goods industry is zero, there is no initial period of zero consumption such as we find in the time-optimal policy, or in the consumption-optimal policy when capital is shiftable. The first phase will last until the capital stock in the capital-goods industry has well surpassed its long-run level, although the total capital stock will still fall short of its long-run level. During the second phase, it may now be optimal to assign the entire flow of investment to the consumer-goods industry, letting the capital stock of the capital-goods industry depreciate. This process may continue through a stage in which both capital stocks exceed their long-run levels. If so, it will last until the capital stock in the capital-goods industry has again fallen below its long-run level, but the total capital stock will still be above its long-run level. It may then... [ABSTRACT FROM AUTHOR]

This article comments on Gordon's study of developments in the measurement of price indexes for fixed capital goods as of September 1971. The major point of Gordon's paper is that wholesale prices indexes contain deficiencies which make them unsuitable as deflators for fixed capital. He contends that as a result measures of fixed capital stocks and fixed capital investment have been biased. This conclusion is based primarily on a comparison of wholesale price and unit value indexes, which presupposes the validity of the unit value indexes as measures of transaction prices. Although this assumption is crucial to the analysis, little justification is presented to support its acceptance. The most recent source of information on the relative reliability of unit values is contained in the Report of the Pricing Subcommittee of the U.S. Interagency Committee on the Measurement of Real Output. Gordon minimizes the relevance of this report to his study for two reasons: insufficient product overlap, and emphasis in his study on tightly specified goods.

This article presents a comment on earning retention, new capital and the growth of the firm. Baumol, Heim, Malkiel and Quandt (BHMQ) attempt to compare the profitability of investments from internally generated funds relative to investments made using debt, preferred stock or common stock financing. The paper purports to show that return on investments financed with internally generated funds is substantially lower than returns on investments financed with common stock. The purpose of this note is to present some theoretical and empirical problems which may have seriously affected these results. In discussing how risk should be included in the analysis, it is also appropriate to consider how it should be measured. The two proxies suggested by BHMQ appear to be strictly ad hoc. They appear to bear little relationship to the risk proxies used in much of the empirical literature. It is not surprising, therefore, that the risk coefficients are found to be insignificant in their regression analysis.

The article focuses on optimal investment allocation between consumer goods and capital goods. The objective of maximizing the production of capital goods is not as peculiar or irrational as may appear at first sight. Although it is generally considered that consumption is the ultimate end of all economic activity, it is obvious that the levels of consumption attainable in the future depend on the future capital stock, and this in turn, in a closed economy or one with stagnant net export earnings, depends upon the current level of production in the domestic capital-goods sector. Hence there would be much to recommend making one of the targets of a development plan the maximization of the output of capital goods with a view, of course, to ultimately maximizing consumption at some future date beyond the termination of the plan period. Some such reasoning must underlie a conception like the law of the superiority of heavy industry to light industry and the economic policy associated with it.

The article focuses on the mortgage portfolio of mutual savings banks. A mutual savings bank has no capital stock. It is operated for the benefit of its depositors, who are the owners. It receives savings in the form of time deposits, which constitute roughly 90 percent of total liabilities; the remaining liability items are the guaranty fund and profit and loss account, Christmas and other club deposits, interest and rents, less current expenses, and miscellaneous liabilities. It invests the aggregate funds chiefly in securities, real estate loans, and personal loans, and makes the profits available to the depositors in the form of dividends at regular intervals. The volume of mortgage loans held fluctuated with the general business cycle, while the volume of new loans made coincided with the real estate cycle. Legal and economic factors have influenced mortgage loans and alternative investments.

This article presents a model for social production and investment in natural resources industry. The article attempts to provide such a model. Optimization is viewed from the standpoint of society; however, the social benefit function may easily be viewed as a profit function and the results applied to the optimum behavior of the firm. In general, the article is divided into four sections. In section 1, a general model for social production and investment in natural resource industries is specified. In section 2, an economic interpretation of the characteristics for optimum time paths of production and investment are discussed under the assumption that society's planning horizon is finite. In section 3, equilibrium conditions under an infinite planning horizon are considered. Finally, in section 4, the authors' results are generalized to include multiple interrelated resources. The Appendix takes up some technical problems associated with the infinite planning horizon and second-order conditions for optimization.

The article focuses on estimates of the effect of alternative investment rates on economic growth because of different appraisals of the importance of embodiment of new knowledge in capital goods. Recent literature seems to imply that the issue can be resolved by discovering what fraction of developments that can potentially raise productivity must be embodied in capital. The author suggests that the whole embodiment question is of little importance for policy in the U.S.; that the issue is not usefully formulated in terms of the fraction of progress that is embodied; and that the right question cannot be answered beyond a showing that is unimportant. The embodiment effect operates through the age distribution of the gross capital stock of business. This distribution can be summarized accurately enough by average age, provided weights of different types of capital goods; particularly structures and equipment are held constant. The force of calculations depends on the fact that average age is a variable that does not and can not vary much under normal conditions, so that one year is a big change. This is especially the case with equipment, for which the age level is short and observed variation is small.

This article presents discussion on the relation of actual current profits to investment. Professor Edwin Kuh, discusses briefly corporate saving and the strong preference for internal funds shown by most corporations. Present theory appears unable to explain why such things exist. It seems, however, that by introducing uncertainty in the model, one should be able to provide a simple and natural explanation. The only way of being certain not to miss a favorable investment opportunity is to keep sufficient cash at hand. Professor Dale W. Jorgenson's investment theory is based on two behavioral assumptions: capital stock is taken as fixed, and the firm determines the optimal level of output. This is a very reasonable short-run assumption. Second assumption, the output level determined under the first assumption is taken as fixed, and the optimal amount of capital stock is determined. This seems to be a rather doubtful assumption. The two assumptions together imply that investment is a trial-and-error process. Jorgenson states that it is easy to see that the process will converge. It seems natural to assume that intelligent management will see more than one step ahead in this process and try to optimize output level and capital stock simultaneously. This seems particularly natural under the perfect certainty assumed by Jorgenson.

This article comments on an article about the limitations of capital coefficients by R. A. Gordon. In attempting to throw some light on the difficulties of using an aggregate capital coefficient, Gordon was able to apply his data on capital-output relationships to a discussion of the collapse of investment in the U.S. during the depression of the thirties. His conclusions show the need for looking at the sector capital coefficients and other factors affecting the volume of investment besides the growth of output. The interesting feature in his article is his use of a net-of-depreciation estimate of the capital stock when measuring the capital-output relationships. The estimates of the gross capital stock of the U.S. are based upon the usual one-hoss shay assumption about investment, i.e., that the assets are replaced fully when they are retired at the end of the assumed length of life. The usefulness of these estimates may be questioned because of the limited basis on which they are built. Almost unchanged asset-lives throughout the entire period and the one-hoss shay assumption do limit the applicability of the material, but such constraints seem to be a necessary preliminary to the derivation of statistical series.

The article presents circumstances under which acceleration will lead to magnification. Similarly, the author investigates some conditions under which acceleration will imply diminution of fluctuations in investment. The output of the investment-goods industry is equal to net investment plus depreciation so that magnification of the investment-goods industry is said to occur when a given percentage change in income goes hand in hand with a larger percentage change in net investment plus depreciation. Thus, magnification may be relative either to gross national income or net national income. Diminution is said to occur when a given percentage change in income yields a smaller percentage change in net investment plus depreciation. As gross national income is equal to net national income plus depreciation, it follows that depreciation is magnified relative to national income, net or gross. The percentage change in depreciation is equal on the linearity assumption to the ratio of net investment to capital. Therefore, the sufficient condition for magnification now becomes that the ratio of net investment to capital be greater than the percentage change in net national income. This is equivalent, however, to the condition that the ratio of net national income to capital is a decreasing function of capital.

The article focuses on factors that should be considered while making decision about investment in business firms. According to the author there has been little effective integration of the scattered theorizing and scanty inductive findings in the area of determination of investment. In the usual simplified model, investment is envisaged as producing a net expansion of the firm's stock of capital and thereby an expansion of its future stream of output and revenues. The amount of expansion of output achieved by additional net investment is determined by a known production function, and the revenues from sale of that output are determined by a known market demand schedule. The author here examines some of the simplifying assumptions of the orthodox investment-determination model in the light of recent empirical findings about modern business structure and practices. In traditional simplified theory, both investment outlays and the supply of investment funds are net concepts. The firm is pictured, as enlarging its stock of capital to provide for increased output.

The article comments on an article by economists Walter Galenson and Harvey Leibenstein, on investment criteria, productivity and economic development. To the present writer it seems, however, that in formulating their criterion of the marginal per capita reinvestment quotient, the authors have disregarded an important qualification; when discussing the choice between long-lived and short-lived capital stock, their failure to state the criterion in precise form has led them into error. And a similar oversight occurs when they formulate their second principal proposition concerning the significance of investment policy for the growth of population. In general, to determine the effect on the rate of investment of the choice of production technique, authors have to compare the net loss in output from choosing a deepening process with the gain from keeping the consumption of the unemployed below that of the employed. The picture changes if the years are examined when replacement becomes due for the short-lived equipment but not yet for the long-lived. One may argue, as the authors apparently do, that at the longer replacement can be postponed, the better the economy will be able to bear the temporary decline in the increase in the stock of operating capital (gross investment minus replacement) caused by the necessity to replace.