Search

Examines economic equation systems by describing the simultaneous equation model, its application to the economy as a whole, and a systemwide approach to microeconomics. The systems approach focuses on particular segments of the economy such as consumer spending. (Author/KC)

A firm minimizes cost or maximizes profit subject to the constraint implied by a production function. Demand equations for inputs, formulated in terms of changes over time, are described in two steps. The first is the total input decision, which describes the Divisia input volume index in terms of the change in output (for cost minimization) or price changes (for profit maximization). The second is the input allocation decision, which describes the changes in the demand for the individual inputs in terms of the Divisia input volume index and the input price changes. It is shown that the input allocation decision allows a simple transformation so that (1) the change in the demand for each transformed input is independent of the changes in the relative prices of all others and (2) the log-change in output is the sum of certain components, each representing the contribution of one transformed input, in such a way that the interaction of these inputs is confined to terms of the third order of smallness. [ABSTRACT FROM AUTHOR]

The article focuses on the price and quantity index numbers. More recently these index numbers were applied by L.R. Christensen and D.W. Jorgenson to the United States national accounts, who noted that they have several advantages: they are symmetric in the data of the successive periods and they are consistent in aggregation. Given that the indexes are weighted means of price and quantity log-changes, there is a natural extension to second-order moments which measure the dispersion of price and quantity changes around these means. The factor reversal test requires that the sum of the log-changes in the price and quantity indexes be equal to the log-change in total expenditure, but formula shows that there is a discrepancy, equal to the weighted mean of the log-changes in the expenditure shares. The price and quantity log-changes are also shown. There were substantial price increases, but the development was evidently far from proportional, and most of the quantity log-changes were negative. The difference between corresponding expenditure shares is given.

Explores methodological advances in economic equation systems. Details on the simultaneous equation model; Information on the economy-wide econometric models; Explanation on the system-wide approach to microeconomics.

The article presents a comment by the author on the article "Ideal Index Numbers that almost satisfy the Factor Reversal Test," by Professor Kazuo Sato, published in the November 1974 issue of the journal "Review of Economics and Statistics." According to the author Sato analyzes the ratio of the product of the price and quantity indexes to the expenditure ratio, which the factor reversal test requires to be 1. This is called the logarithmic discrepancy of the factor reversal test and is noted as D. There are two separate equations for which the logarithmic discrepancy is considered as DA and DB. If the expenditure shares do not change very much, xi - y, (where x and y are commodity shares of the ith commodity), being close to zero for each i, the discrepancy D is very close to zero for most reasonable choices of f( ). But the author says that he rejected this choice because D is bounded under the specification (3) given in the article, for 0 <=x and Y <=1.