variable returns to scale in production and patterns of specialization this paper discusses some trade and welfare implications of the two sector model based on increasing returns to scale irs in one industry and decreasing returns to scale drs in the other it has been shown by horst herberg and murray kemp that given homothetic production functions with irs in one industry and drs in the other the production possibilities frontier ppf is strictly concave to the origin near the irs axis and strictly convex to the origin near the drs axis while this result constitutes an important finding and is contrary to the general impression among economists even twelve years after the publication of herberg and kemp s paper no attempt has been made to analyze its implications for welfare and patterns of specialization in this paper i consider a simple twocommodity model with irs in one industry and drs in the other and discuss some interesting implications of variable returns to scale vrs first i demonstrate that in this model if a small open economy specializes completely in production it will do so in the drs commodity and not in the irs commodity as is generally believed second if at a given price ratio an internal production equilibrium exists a welfaremaximizing small open economy will never specialize completely in production even though the ppf exhibits decreasing opportunity costs over a part of its range third given output generated economies and diseconomies of scale welfare maximization for a small country requires a permanent tax subsidy scheme encouraging expansion of the irs industry and contraction of the drs industry finally in a two country model with identical tastes and technology across the countries free trade equilibrium may result in incomplete specialization by the exporter of the irs commodity and complete specialization by the exporter of the drs commodity in the course of the analysis i argue that tinbergen s formulation of frank graham s case for protecting the irs industry is incorrect i then present a possible reformulation of it in section i the basic production model is introduced in section ii the model is analyzed and in section iii it is argued that all the results continue to hold in the multifactor case

effects of quotas under variable returns to scale the large country case the welfare effects of import quotas have been studied by a host of trade theorists see for example dei 8 brecher and bhagwati 3 and neary 20 recently chao hwang and yu 4 have examined the welfare impacts of quotas under variable returns to scale vrs for a small home economy the purpose of this paper is to consider the welfare effects of quotas under vrs in a two country trading world the large country case for both the home as well as the foreign country specifically we will explore the conditions under which a quota can benefit either the home country the foreign country or both countries in addition we will derive and interpret a formula for computing the second best quota in the presence of vrs

interest rates and currency prices in a two country world abstract this paper is a theoretical study of the determination of prices interest rates and currency exchange rates set in an infinitely lived two country world which is subject both to stochastic endowment shocks and to monetary instability formulas are obtained for pricing all equity claims nominally denominated bonds and currencies and these formulas are related to earlier closely related results in the theories of money finance international trade

gains from trade under variable returns to scale recently several trade theorists have investigated the welfare consequences of international trade under variable returns to scale for example kemp and negishi 11 using the revealed preference arguments obtain the sufficient conditions under which the opening of trade and an improvement in the terms of trade are nonharmful in the presence of variable returns to scale production subsidies and consumption taxes eaton and panagariya 7 reexamine these issues in the context of pareto welfare criterion it is noteworthy that the assumption of constant returns to scale is retained in their discussions on production subsidies and consumption taxes 1 the purpose of this paper is to explore the welfare implications of tariffs and consumption taxes as well as the welfare rankings of these policy instruments under variable returns to scale we obtain several interesting results for example social welfare for a small country can be maximized by introducing in addition to free trade a policy of production tax cum subsidy such that the output of the industry exhibiting greater smaller returns to scale is pushed to the maximum minimum a higher tariff rate needs not result in a lower welfare whereas a higher rate of consumption tax necessarily leads to a lower welfare furthermore a tariff may be superior to an equivalent consumption tax the paper evolves as follows the model and assumptions are presented in section ii section iii is the analysis regarding non optimality of free trade free trade versus no trade

the influence of fundamentals on exchange rates findings from analyses of news effects as we survey the literature of macroeconomic news in the foreign exchange market we can by now look back on nearly 30 years of research the first studies which analysed news effects on exchange rates were established in the early 1990s see for example dornbusch almost at the same time meese and rogoff published their influential paper revealing the forecasting inferiority in exchange rates of structural models against the random walk this finding has shocked the pillars of exchange rate economics and thus cast general suspicion on research focusing on fundamentals in this field the eventual rising popularity of event studies can partly be attributed to the re establishment of the raison d etre of exchange rate economics this work focuses on systematically surveying this literature with particular respect to its primary goal i e shedding light on the analytical value of fundamental research thus its major findings are first fundamental news does matter whereas non fundamental news matters to a lesser degree second news influences exchange rates via two separated channels i e incorporating common information into prices directly or indirectly based upon order flow third with a few exceptions the impact of fundamental news on exchange rates is fairly stable over time

the effects of import quotas on national welfare does money matter recent evidence shows that there is an increasing use of non tariff barriers to trade ntbs and especially of quantitative restrictions such as import quotas in the world economy to protect import competing industries see table i 1 international trade theory however has traditionally focused on the welfare effects of tariffs as well as on the equivalence between tariffs and quotas with little attention paid to the welfare implications of quotas the latter have basically been restricted within the traditional heckscher ohlin trade model where for the case of a small open economy import quotas always reduce welfare a few recent studies have attempted to fill in this gap in the literature for instance young 19 compares optimal tariffs and quotas for a large country in a stochastic environment neary 14 on the other hand investigates the welfare implications of tariffs quotas and voluntary export restraints under different assumptions on capital mobility finally chao hwang and yu 3 4 examine the welfare effects of import quotas under variable returns to scale although the existing literature has generated important policy implications most of the analysis has been conducted within a barter exchange framework it is well known however that the introduction of money can alter results obtained within a non monetary environment 2 accordingly this paper attempts to re examine the welfare effects of import quotas for a small monetary economy we develop a two sector trade model in which money enters the economy

unionization and distribution of income under variable returns to scale abstract variable returns to scale are introduced into the two sector analysis of unionization and income distribution and some new results are obtained specifically with increasing returns to scale it is possible for both union and non union workers to lose gain from unionization even when the unionized sector is relatively capital labor intensive

a theoretical explanation of some stylized facts of economic growth this paper presents a three good two country general equilibrium model that is consistent with several stylized facts of economic growth the three goods are manufactures agriculture and services manufactures are subject to economies of scale the model predicts that services a nontraded good must be more expensive in the country with higher per capita income it also shows that as per capita income increases we should expect the productivity in commodities relative to services to rise the model is able to generate many other stylized facts of economic growth

can bank be a source of contagion during the 1997 asian crisis abstract this paper tests whether bank can be a source of contagion during the 1997 asian crisis using asset return data from a crisis country thailand in particular i examine whether thai banking sector can produce contagion effects in both conditional means and volatilities of its foreign exchange and stock markets during the crisis after controlling economic fundamentals the test results show that contagion in mean effects appear to be multidirectional since return shocks emanating from any one of the three markets can sweep across all markets but contagion in volatility effects are mainly driven by the negative return shocks originating in the banking sector overall the empirical evidence indicates that the past return shocks emanating from banking sector have significant impact not only on the volatilities of foreign exchange and aggregate stock markets but also on their prices suggesting that bank can be a major source of contagion during the crisis

entrepreneurship and regional development some conceptual issues o farrell p n 1986 entrepreneurship and regional development some conceptual issues reg studies 20 565 574 this paper attempts to clarify and improve understanding of the concept of entrepreneurship in national and regional development the nature of entrepreneurship is discussed and it is shown that the entrepreneur and the capitalist are conceptually distinct that it is useful to differentiate between the entrepreneurial and managerial functions and that the essence of the concept is the initiation of entrepreneurial acts when the individual is behaving in an innovative way under uncertainty the distinction between entrepreneurship and arbitrage is briefly clarified and the relationship between entrepreneurship and large organizations is discussed our understanding of spatial variations in entrepreneurial behaviour is currently insufficient for the purpose of explanation and policy prescription

the relation between stock prices and inflationary expectations the international evidence this paper provides empirical evidence on the relation between stock returns and inflationary expectations for nine countries over the period 1971 80 the fisherian assumption that real returns are independent of inflationary expectations is soundly rejected for each major stock market of the world using interest rates as a proxy for expected inflation our data provide consistent support for the geske and roll model whose basic hypothesis is that stock price movements signal negative revisions in inflationary expectations finally a weak real interest rate effect was found for some of these countries

charts noise and fundamentals in the london foreign exchange market this paper presents some empirical evidence on the prevalence perceived importance and nature of chartist or technical analysis in the london foreign exchange market if noise traders see e g de long et al i987 are defined as those speculators who do not base their trading strategies on a consideration of market fundamentals then it clearly encompasses those traders who employ chart analysis i e those who base their strategies on the analysis and extrapolation of past price movements alone

optimal currency hedge ratios and interest rate risk abstract the objective of this article is to provide a framework for the interpretation of the optimal currency hedge ratios on foreign investments taking into account interest rate risk this is made possible by using a continuous time setting in the spirit of merton 1969 we focus on the importance of the interest rate differential forward basis in setting the optimal currency hedge because of the influence of interest rates on exchange rates more specifically we consider two discount bonds a domestic and a foreign one which follow stochastic processes possibly correlated with the other state variables of the model it is shown that the optimal hedge ratio can be split into five components a a macro economic component which is a function of the volatility of the interest rate differential and its covariance with currency movements this term depends on the currency considered but not on the asset being hedged b an asset specific term which is directly related to the covariance of the foreign currency asset return with exchange and interest rate movements c a speculative term function of the investor s risk preference and of the conditional risk premium on the exchange rate and d two stochastic opportunity set hedging terms the analysis of the optimal hedge ratio is illustrated on the period december 1970 1989 for stock and bond investments in seven countries jel g15 f31

welfare effects of quotas under variable returns to scale recently there has been a growing use of quantitative restrictions on imports by countries for protecting their import competing industries it is well known that the quantitative restriction on imports set below the free trade level would result in higher domestic prices smaller quantities of importables available to consumers and hence a reduction in national real income thus import quotas similar to tariffs in a small economy reduce welfare this result has been derived in the traditional heckscher ohlin trade model with production functions subject to constant returns to scale crs while the assumption of crs greatly simplifies the analysis it is not easily justified in view of reality firms usually are exposed to various kinds of externalities which give rise to economies or diseconomies of scale

increasing returns and the gains from trade it is known that gains from trade are positive in the presence of increasing returns to scale if all increasing returns industries expand in the shift from autarky sufficient conditions for gains when some increasing returns industries expand and others contract suffer from the limitations that the production frontier must be convex changes must satisfy a prespecified hierarchical pattern or that total factor supplies must be fixed between equilibria conditions which can not generally be assured this paper develops a necessary and sufficient condition for gains and from it a sufficient condition that does not depend on these restrictions copyright 1991 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

a note on the neoclassical ambiguity and the specific factor production model under variable returns to scale abstract this note investigates the relationship between commodity price changes and factor rewards in a specific factor production model that admits variable returns to scale the principal result is that in the presence of variable returns to scale the so called neoclassical ambiguity may be resolved without resorting to detailed knowledge of the mobile factor s preferences that is to say the effect of a commodity price change may as it does with the returns to those factors specific to each industry raise or lower the real reward of the mobile factor in terms of either commodity depending only on the characteristics of the technology

exchange rate theory and practice this volume grew out of a national bureau of economic research conference on exchange rates held in bellagio italy in 1982 in it the world s most respected international monetary economists discuss three significant new views on the economics of exchange rates rudiger dornbusch s overshooting model jacob frenkel s and michael mussa s asset market variants and pentti kouri s current account portfolio approach their papers test these views with evidence from empirical studies and analyze a number of exchange rate policies in use today including those of the european monetary system

common stock returns real activity money and inflation some international evidence abstract this paper tests whether the negative relationship between real stock returns and inflation in the united states is in fact proxying for a positive relationship between stock returns and real activity variables in six major industrial countries over 1966 1979 consistent with fama s proxy effect hypothesis we document a negative relationship between inflation and real activity and a positive one between real stock returns and real activity variables real activity variables dominate money growth rates and expected and unexpected inflation in explaining real stock returns a puzzling result that still remains is the positive role of money and the negative role of expected inflation in explaining these real stock returns in all major industrial countries

understanding the competitive process a guide to effective intervention in the small firms sector abstract the paper describes a project undertaken within the economic and social research council s competitiveness of british industry research programme the aim of the project was to assist agencies who intervene in a local economy to try to help individual small firms guidance currently available to such agencies was considered to lack an adequate theoretical basis in relation to either the choice of firms who should be granted assistance or the form of assistance which might be given in particular there is a lack of recognition that there is scope for management strategy among smaller firms affecting the way they compete in the market place and having a clear bearing on their revealed performance from a study of 100 small firms located in telford new town criteria were derived for classifying the competitive stance of small firms this was identified as the key to the potential performance of the small firm the extent to which it reveals a potential for future growth can determine whether a firm is or not a suitable candidate for assistance and the strengths and weakness in an individual firm s stance can determine the most suitable form of assistance to give the survey and analysis exercise leading to the identification of components of competitive stance are described and the classification of firms into a range of stance types then the usefulness of the competitive stance classification as a guide to selection of firms and choice of form of assistance is considered

tariffs quotas and voluntary export restraints with and without internationally mobile capital this paper presents a general framework for comparing the effects of tariffs quotas and vers voluntary export restraints both with and without international capital mobility expressions for the shadow price of foreign exchange and the shadow price of capital under each type of trade restriction are derived and it is shown that although international capital mobility raises the welfare cost of tariff protection it lowers the welfare cost of quantitative restrictions in most cases the effects of exogenous shocks in the presence of quotas are intermediate between those in the presence of tariffs and those in the presence of vers tarifs douaniers contingentements et restrictions volontaires d l exportation quand le capital est ou n est pas mobile internationalement l auteur presente un cadre general d analyse qu il utilise pour comparer les effets de tarifs douaniers de contingentements et de restrictions volontaires a l exportation dans des contextes ofu le capital est ou n est pas mobile internationalement l auteur derive le prix fictif du change etranger et le prix fictif du capital sous l un et l autre types de restrictions au commerce et montre que meme si la mobilite internationale du capital augmente le cofut en terme de bien etre de la protection tarifaire elle reduit le cofut en terme de bien etre des restrictions sur les quantites echangees dans tous les cas les effets de chocs exogenes quand des contingentements existent sont toujours dans la fourchette entre ceux qu on observe quand des tarifs douaniers existent et ceux qui prevalent quand des restrictions volontaires i l exportation existent

business organization segmentation and location taylor m and thrift n 1983 business organization segmentation and location reg studies 17 445 465 this paper is intended to provide a coherent theoretical framework for industrial geography industrial economics and organization theory based on the notion of the segmentation of business organizations the literature on dualism and segmentation of business organizations is reviewed and found wanting an alternative process oriented account of segmentation of the business organization is presented which can account for the structural variations in present day developed economies the geographical implications of the framework are brought out

the us monetary performance prior to the 2008 crisis this article uses a structural vector autoregressive svar approach to study the different shocks to the monetary performance in the two decades of the us economy prior to the 2008 financial crisis by using the federal fund rate as a measure of change in the monetary policy this study shows that interest rate expectation is informative about the future movement of federal fund rate and the anticipated monetary policy should be one of the crucial reasons in causing monetary and financial deterioration in the us economy this article discusses a possible conjecture of a low interest rate trap when a persistent and prolonged low interest rate regime led to financial instability

using financial prices to test exchange rate models a note the purpose of this note is to illustrate how tests of exchange rate models can be conducted using financial prices rather than macroeconomic data all empirical tests of exchange rate models have met with limited success so far a major problem encountered is the poor quality of the macroeconomic data used most of the data suffer from large measurement error or cannot even be measured directly for example these models often require measures of changes in expected real activity or in monetary policy such variables can only be poorly estimated from time series models on industrial production or money supply the innovation in this paper is to use financial prices such as stock prices instead of the traditional macroeconomic data there exists convincing empirical evidence that stock returns forecast changes in economic activity as measured by industrial production real growth in gnp employment rate or corporate profits fama 5 and geske and roll 8 in the domestic context stock prices have been used to test the relation between economic activity and inflation e g fama 5 geske and roll 8 and solnik 12 in the same spirit stock returns are used in this paper as proxies for changes in economic activity to test the relation between exchange rates and economic activity interest rates are determined by monetary policies and changes in interest rates are used in this article as indicators of monetary shocks the approach used is introduced in section i while the empirical results are presented in section ii the data cover the eight major western countries over the recent period of flexible exchange rates july 1973 to december 1983