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THE

RESEARCH INSTITUTE FOR
AND BUSINESS ADMINISTRATIONECONOMICS
KOBE UNIVERSITY

l972

KOBE
ECONOMICBUSINESS&REVIEW
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CONTENTS
Page

Patterns of Export Trade of Argentina and Brazil:
A Comparative Study ...............,....................Fukuo KAwATA

1

Entrepreneurship in America .........................,.,.....Tadakatsu INouE

19'
Generalization of Two-Gap Theory ...........................Hikoji KATANo

29

Accounting Measurement and Homomorphism ...,........,..Isao NAKANo

43

An Interpretation of Two Stage Least Squares
Estimators As Indirect Least Squares
Estimators in the Overidentified Case...,...........Hiroshi SADAMIcHl

A Note on the One-dimensional Random Search.........Komayuki ITow

55
61

Exchange Rate Systems and Distribution of
Seigniorage......................,........................,......Kazuhiro IGAWA

65

PATTERNS. OF EXPORT TRADE
OF
ARGENTINA
AND BRAZIL: A COMPARATIVE
STUDY
Fukuo KAwATA
I. Introduction
The purpose of this paper is to make a comparison of export trade patternsof Argentina and Brazil, which are the two largest and most advanced countries

in Latin America.
Firstly, the size of trade of both countries are compared. Before, during

and immediately after the Second World War, the amount of Argentine exports
were larger than those of Brazil. But since the fifties, the situation has been

reversed. Brazilian exporbs have increased so rapidly that they have exceeded

those of Argentina. (See Table I-1.) As to the import trade, we see almost
the same tendency.
Table I-1 Size of Argentine and Brazilian Trade (yearly average)(millions of U. S. dollars)
ImportExportBalance

PeriodArgentina
1936-40
1941-45

1951-55

1956SO
1961-65
1966-70
1971

Argentina

BrazilArgentina
136

29

3ss

152

525

307

389

278

(1oo)

(58)

(1oo)

(71)

590

491
(83)

254

339

(1oo)

(133)

(100)

1946-50

BrazilBrazil

1147
(87)

1172

108

(1oo)

1039
(89)

199

(100)

-133

-103

-183

- 48

1326

9ss

1542

1121

1645

(1oo)

(156)

(1oo)

(147)

1000

1334

1183

1382

(1oo)

(133)

(1oo)

(117)

1290

1410

1275

1356

(1oo)

(1ce)

(1oo)

(106)

!562

2os5

1330

2081

(1oo)

(132)

(1oo)

(1se)

1740

2704

1888

37oo

(1oo)

(155)

(1oo)

(196)

Note 1: Figures in parentheses denOte the percentage of

15

M

242

- 16

-148

-996

Brazilian trade as against

Argentine trade.
Source: U. N., Yearbook qf International Trade Statistics
IMF, Internationat Financial Statistics

Secondly, the rate of export growth is compared.

During the twenty years

ranging from 1950 to 1970, the annual rate of growthof Argentine exports wasFUKUO KAWATA

2of Export Growth in Argentina

Table I-2 Rate
1950-55

Country

and Brazil(o/o)

1955-oo

1960-65

1965-70

1950-70

World

8. 45

6. 23

8. 02

11. 13

8. 46

Latin Arnerica

4. 27

1. 61

4. 93

6. 39

4. 29

Argentma

-4. M

3. 04

6. 71

3. 50

2. 03

BrazilO. 98-2. 26

4. 68

1!. 42

3. 58

19. M

15. 05

15. 84

17. 98

17. 12

cf

Japan

'

Source; IMF, lnternaiional Trade Statistics

2.030/,, while that of Brazilian exports was 3.580/.. Brazilian exports increased

about 1.8 times as fast as Argentine exports. But the rate of export growthof these countries is smaller than that of the Latin American average, and lessFigure 1 Comparison Qf the Development of World, Japanese, Latin American,
Argentine and Brazi!ian Exports (1950-1970)$280.1bill

z,
•.EY

5 200oQts:.2

pto;xaS*p=100 ofo

WorldExports
Latin AmericanExpo'-- ------e---------------$55.2billion-- -----

JapaneseExports
BrazilianExports
ArgentineExportsot'milliono

Latin AmericanExports
"$pos

1
'

5

5V'

$5,950millionb"etsb9.-'l.>i.S•s.?.Lif:ee,./<tb.!..$Al,,;<71i`mili,ILoE•

million..;...ttr.a.filianExports.kss-------"-l-l-t N''!

l'

N/N----------

ArgentineExports

NNz$820N/millionV

50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70

Year

PATTERNS OF EXPORT TRADE OF ARGENTINA AND BRAZIL: 3
A COMPARATIVE STUDY

than half the rate of the world export growth, signifying a relative stagnancy ofthese countries' exports, In the periods of 195S-1960, and 1960-65, Argentina
took the lead, but in other periods fell behind. It is quite remarkable that Brazil

expanded rapidly her exports more than 100/. annually in the 1965-70 period.
(See Table I-2.)
Generally speaking, the rate of export growth of both countries is so smallthat the share of their exports in the world market tends to decrease. For
instance, in 1950, the share of Argentina and Brazil in world exports was 2.130/o

and 2.44%, but it came down to O.960/, and 1.139/. in 1960, and to O.630/. andO.980/o in 1970 respectively. The development of export trade of both countries
from 1950 to 1970 is rather stagnant, although in the late 1960's brisk activities

were seen in Brazilian exports. (See Fig. 1.)

Thirdly, the ratio of trade to GNP is compared. On the whole, the rateof Argentina is larger than that of Brazil both in exports and in imports. Only
during the 1950-54 period, the Brazilian ratio was larger than that of Argentina.

The Argentine ratio was higher than 109,i. during the 1955-59 and 1960-64
periods, but the Brazilian ratio did not reach the 100/, level throughout theperiods under review.
It has been mentioned that the rate of export growth of both countries has
lagged far behind the world average. One of the reasonS why their export growthis so slow is that these countries produce and export chiefly those primary products

whose rate of growth in the world production and trade is small. For example,
Argentina's principal products are wheat, maize, meat and wool, while Brazil's

main products coffee, cacao, cotton and sugar. The annual rates of growth in
the world production of these commodities range from 1.40/. for cacao to 3.1O/. forsugar during the thirty years from 1938 to 1968, and 2.30/. for cacao and wool
to 4.20/o for sugar in the 1949-68 period. These figures compare quite unfavorablywith the growth rates of crude petroleum, crude steel, cement and motor vehicles,
whose annual rates of production growth range from S.40/, for crude steel to 7.00/ofor crude petroleum in the 1938-68 period and from 7.30/, for crude petroleum
to 8.40/, for cement in the 1949-68 period.

Table I-3 Ratio of Trade to GNP in Argentina and Brazil (O/o)
ImportExportPeriodArgentina

Brazil

8. 8

7. 3

8.8

6.7

12. 4

7. 0

10, 2

7.6

10. 4

7. 6

9. 2

7. 4

8.2

7. 2

Argentina

Brazil19se--M

6. 7

1955-59
1960-64

11. 6

1965-69

Source; IMF, International Fiuancial Statistics

KAWATAFUKUO

4Table I4 Annual Rate of Growth in the Productionof World Major Commodities

1938-68

1949-68

1951-68

1961--68

Whea't

2. 1

3. 8

3. 9

Maize

2. 5

2.5

3.7

3.9
2.5

Cotton (ginned)

L9

3.0

3.0

L4

Sugar

3. 1

4. 2

3. 9

3. 1

Meat

2. 5

4. 0

3.5

2.8

Wool (greasy)

1.,6

2. 3

2.3

1. 1

-Coffee

L6

2. 9

3. 3

-L4

Cacao (beans)

1. 4

2. 3

2. 3

O, 6

Crude Petroleum

7.0

7. 3

7.5

7. 8

Cru' de Steel

5. 4

8. 1

5. 9

5.5

Cement

6.2

8. 4

7. 8

6. 2

Motor Vehicles

6. 9

7, 5

5. 7

6. 9

cf.

Population

1.5

1.7

1. 8

2. 0

Rice

2.6

3. 0

3. 1

2.3

Tea

2.5

3. 8

2. 8

3. 2

Source :U. N., Statistical

Yearbook, 1969, p. xxL

ll. Commodity Pattern of Exports
Both Argentina and Brazil are specialized in the export of primary products,
so that their exports chiefly come under the categories O, and 2 of the SITC code.

The percentage of food and raw materials accounted for more than 900/. in 1955,
but later their shares in the total exports gradually declined, registering about
800/. in Argentina and 860/. in Brazil. This is due to theprogress of industriali-

zation. The share of manufacturing exports (chiefly SITC 6 and 7) in the total
was ,less than 10/, in both countries in 1955, but later this percentage increased
both in Argentina and Brazil to O.70/. and 1.20/, in 1960, 2.10/, and 6.70/. in 1965,

and 8.10/, and 8.00/. in 1969 respectively. (See Table II-1, and II-2.)
Rapid' as the pace of industrialization in both countries was, the share ofindustrial products in the total exportsi is still very small compared with developed

countries. Moreover, as is reported in the Economist (Sept. 2, 1972) and in the,Banher (July, 1972)(i) a considerable part (for example 400/. in the case of Brazil

and 509/o in the case of Argentina) of their industrial exports is carried out by

multinational companies utilizing Brazil and Argentina as their production base.

' The degree of concentration of export commodities is also an importantelement in the comparison of the export structures of these countries. The coeM(1) J. H. Dunning, "Investment in Argentina,"

The Banker, July 1972, pp. 7357740•

PATTERNS OFEXPORT TRADE ARGENTINAOF
ANDBRAZIL:

5A COMPARATIVE
STUDY

Table II-1

CommodityComposition of Argentine &Brazilian

Value

Exports in(millions of U. S. dollars)

1960

1955

1965

1969

'

Argentina

BrazilArgentina

BrazilArgentina

BrazilArgentina

Brazil

929

1423

1079

1269

1493

1596

1612

2311

639

1064

715

937

1123

1366

1

19

6

988
av

11oo

19

7

av

2as

184

398

194

603

Total

SITC
o

O.4

1

2

198

288

ax

3

o

O.2

13

9

o

6

3

4

35

o
as

74

31

89

47

5

49

10

35

13

co

15

M

ca

6

3

6

6

13

15

78

57
78
52

32
124

7

O.4

3

2

2

16.

•29

8

1•

O.4

2

O.7

11

3

9

2

7

1

13

O.4

11

M
O.4

22

Table II-2 Commodity Composition of Argentine and Brazilian

Exports(o/o)

Source :
Note:

oo
10

U. N., Yearbooh of International Trade Statistics
SITC code signifies:

O. Food and live animals
1. Beverages and tobacco
2. Crude materials, inedible, except fuels
3. Mineral fuels, lubricants, related materials
4. Ariirnal and vegitable oils and fats

5. Chemicals
6. Manufactured goods classined by materials
7. Machinery and transport equipment
8. Miscellaneous manufactured articles
9. Commodities and transactions, n. e. s.

1955

Total

1960

1965

Argentina

BrazilAt'gentina

Brazil1oo. O

1oo. O

1oo. O

1oo. O

68. 9

74. 8

os. 3

1. 3

O. 1

Argentina

1969
BrazilArgentina

Brazil

1om O

1oo. O

1oo. O

1oo. O

73. 8

75. 2

61. 9

os. 3

59. 1

1.5

O. 4

2.3

O.4

1.2 •

SITC
o
1
;

2

21. 4

-

20. 3

22. 6

17. 9

12, 3

as. o

12. 0

26. 1

O-2
Total

90. 3

es. 4

89. 0

93. 2

87. 9

89. 2

80. 7

86. 4

-3.8

o
1.8

1. 0

O.6

o

O.4

O. 1

5.3

}

/

3
4
5
6
7
8
9

2.5

5. 9

2. 9

5. 2

21 7

O. 7

6.8
3.3

1.1

2. 7

O.9

1. 4

O. 3

O. 5

O.5

1. 0

1.0

4. 9

3.6
4.9

-O. 2

O. 2

O. 2

O. 2

1.1

1. 8

3. 2

o

O. 1

O. 1

O. 7

O.2

2. 1

O. 2

O.5

O. 1

1. 0

O. 7

-

Source: U. N.

Yearbook ef rntervmtional Trtide Statisiics

5.4
2.6 l

O.4,
O.9•

FUKUO KAWATA

6

Table II-3

Concentration CoeMcient of Argentine and Brazilian Export Commodities

Year

cf.

Japan

U. K.

u. s.

77. 5

60. 9

49. 8

43. 3

76. 0

M.4

52. 1

43. 5

76. 5

67. 1

53. 6

56. 5

".7

69. 9

65. 0

54.0

51. 4

49. 0

Argentina

Brazil

1955-

72. 4

1960

70r 5

1965

1969

Source: U. N., Yearbook of International Trade
Note: The degree of eoncentration is measured by the Gini-Hirschnan coeficientof concentration. The coeMcient of commodity concentration of exports ofcountry i to be denoted by Cj., is defined as
cj. == ioovi' ;.;( tt/i )2

where Xii stands for the value of country i's exports of commodity i to therest of the world in the reference period, while Xj represents the total valueof country i's exports to the rest of the world in the same period. For
convenience, the coeMcient is expressed in percentage form. (See MichaelMichaely, Concentratien in Intemational Trade, 1962, ch. 2)

cient of concentration measured with the Gini-Hirschman method under the SITC

code (See the note of Table II-3.) reveals us that in the years of 1955 and1966 the degree of concentration is higher in Brazil than in Argentina, while in1969, the relation is reversed. In Brazil the coeficient is decreasing from 77.5
in 1955 to 76.0 in 1960, to 67.1 in 1965 and to 65.0 in 1969. In Argentina it isalso declining except in 196S. (See Table II-3.) The declining tendency ofthe concentration coeMcient in both countries means that their export commodities tend to become diversified. Although the coeMcient of concentration ofexports tends to decline in both countries, the degree is still higher than that ofindustrial countries. For example, the figure registered in 1969 54.0 in Japan,
Table II-4 Principal Items of Argentine Export in Value (average of five years)(millions of U. S. dollars)

SITC
1. 011
2. 041
3. 0444. 081Meat
Wheat

1951-55'
1956-60

1961-65

1966--70

158

254

287

397

!80

144

1%

160

62

88

131

205

93
705
71
138
209
os

Maize
FodderSub-total (14)
5. 211 Hides and Skins undressed
6. 262 Wool

ca

65

446

551

97

85

146

121

Sub-total

ms

206

49

(5-6)

7. 442.1 Linseed

8. 532

Quebrachoextracts

35

35
21

Total .(1-8)

773

812

Source:oil

U. N., Yearbookof Jnternatioual Trtide Statistics

co
861

85
103
188

14

26
19

976

1095

PATTERNS OF EXPORT TRADE OF ARGENTINA AND BRAZIL: 7
A COMPARATIVE STUDY

51.4 in the United Kingdom, and 49.0 in the United States. When one commo-dity group under the SITC code accounts for 1000/, of the exports, then thecoeMcient shows 100. But when the exports are distributed evenly to eachcommodity group, that is each group takes up 100/, respectively, then the coef-

ficient registers 31.26. The coeMcient ranges, therefore, from the maximumof lOO to the Minimum of 31.26. .

Major export commodities of Argentina and Brazil are food and raw materials.

The principal items of food exports comprise meat, wheat, maize and fodder
for Argentina, and sugar, coffee and cacao for Brazil. (See Table II-4 and 6.)

The total amount of the main food items accounts in the 1966-70 period forabout 550/o of the total exports of Argentina, and about 470/o of those of
Brazil. The relative importance of the main food items has remained almost
unchanged in Argentina since the 1950-60 period, but it has been decreasing
Table II-5 Principal Items of Argentine Exports(averages of five year periods) (%)

'

SITC

1. 001 Meat
2. 041 Wheat
3. 044 Maize
4. 081 Fodder

1951-55

19ss-60

1961-65

1966-70

15. 9

25. 4

22. 3

25. 4

18. 1

14. 4

15. 0

10. 3

6. 2

8. 8

10. 1

13. 1

4. 7

6. 5

7. 2

6. 3

54.6

55. 1

Sub-total (1-4)

44.9

55. 1

5. 211 Hides & Skins undressed

9.7

8.5

5.5

3.7

6. 262 Wool

14. 6

12. 1

10. 6

6. 6

Sub-total (5-6)

24. 3

20. 6

16. 1

10. 3

7. 422.1 Linseed Oil
8. 532 Quebracho Extracts

4. 8

3. 5

3. 7

1.7

3. 5

2.0

1. 1

L2

Total (1-8)

77. 5

81. 2

75. 5

68. 3

Source: U. N., lnternational Trade Statistics
Table II-6 Principal Items of Brazilian Exports in Value (average of five year periods)(millions of U. S. dollars)

SITC

1961-65

1966-70

41

53

95

co2

714

799

92

71

Sub-total (1-3)

1104

M

os

914

801

962

4. 263 Cotton
5. 281 Iron Ore

139

47

108

118

22

133

Sub-total (4-5)

161

"

77

91

158

251

Total (1-5)

1265

1oo5

986

1213

1951-55

1956-60

1. 06 Sugar18

2. 071.1 Coffeeax

3. 072 Cacao

Source: U. N., Yearbook of Tntetrational Trade StatisticsFUKUO KAWATA

8in Brazil. (See Table II-5 and 7.) The principal articles of raw materials
exported are wool and hides and skins for Argentina, and cotton and iron ore
for Brazil. The amount of exports of these main crude materials is far smaller

than that of the major kinds of food for both countries. (See Table II4 and
6.)

As has been stated above, the share of exports of both countries in the vv'orldmatket has been declining. One of the reasons of their declining share is thefact that their principal exports have been losing their competitiveness. In
Argentina, beef exports accounted for 570/. of the world in the 193ZF38 period,
but the share decreased to 389/, in the 1948-52 period and to 220/. in the 1966-68

period. The declining share of exports in the world market is also noticed in thecase of wheat, maize and wool. (See Table II-8.) For Brazil, the share ofcoffee exports in the world market was 530/. in the 193zF38 period, but it fell toTable II-7 Principal Items of Brazilian Exports (O/o)

SITC

1951-55

1966--70

1961-65

1956-60

1• 06 Sugar

L2

3. 1

3.6

4. 6

2. 071.1 Coffee
3. 072.1 Cacao

64. 6

60. 1

50. 6

38. 7

6.0

7.3

2. 4

3. 3

Sub-total (1-3)

71. 8

70. 5

56. 6

46. 6

4. 263 Cotton
S. 281 Iron Ore

9. 1

3. 6

7. 7

5. 7

L4

3. 2

5. 4

6.4

Sub-tota! (zF5)

10. 5

6.8

13. 1

12. 1

Total (1-5)

82. 3

75. 3

69. 7

58. 7

Source: U. N., Yearbook of International Trade Statistics

Table II-8 Share of Argentine Primary Exports in the World Market(in thousand metric tons)

Commodity
1. Beef

2. Wheat

3. Maize

4. Wool

1961-65

1966-68

us

392

345

959

1380

1577

35. 8

28. 4

21. 9

2437
25455

3220

3179

44332

50654

1934-38

1948--52

1956-60

vsrorld

507
730

268
510

AIW (O/,)

56. 7

38. 2

Argentina

Argentina

3218

1861

World

13950

20764

A/W (%)

23. 1

9, O

9.6

7.3

6. 4.

Argentina

6527

1068

1758

World

10200

4452

8739

2650
20280

27054

A/W (O/.)

63. 9

23. 5

20. 1

13. 1

13. 5

Argentina

111

92

91

123

93

World

1093

1102

1312

1219

1206

AIW (O/,)

10. 2

8. 3

6.9

10. 1

7. 7

Source: FAO, Trade Yearbbok

3654

PATTERNS OF EXPORT TRADE OF ARGENTINA AND BRAZIL: 9
A COMPARATIVE STUDY

320/o in the 1966-68 period. Such a diminishing share in the world market isalso true for cacao. The share of sugar exports, however, has been increasing,and more remarkable is the rising share in the world production for iron ore,although the share is not as large at present as for other traditional exports.

The share of cotton exports moved downward from 60/, of the 193ZF38 period
to 2.50/o of the 1956-60 period, but later it came up to the !evel of the 1948-52

period. (Eee Table II-9.)
Table II-9 Share of Brazilian Primary Exports in the World Market(in thousand metric tons)
1934-38

1948-52

1956-60

1961-65

i966-68

Coffee Brazil

875

World

1646

1oo7
1942

942
2404

1041
3224

Commodity

1
2.

52. 8

51. 8

39. 2

114
687

98
695

109
785

975
2867
34.0
79
1095

BIW (O/.)
Sugar Brazil

16.5

14, 1

13. 9

7. 2

9. 2

42

97

379

553

1011

World

1oo82

18657

19852

2. 4

3. 0

5. 0

Cotton Brazil

O.4
194

11051
O. 9

15544

BIW (O/,)

140

M

World

3067

3321

224
ss29

BiW (o/,)

6. 3

2383
5. 8

211
3770

2. 5

5. 6

5. 8

BIW (O/.)
Cacao Brazil

World
3.

4.

32. 3

101
1096

(1951-55)
5.

Iron ere* Brazil

2127

3853

9433

16020

World

1509401984802785203494osBfW (O/.)

L4

1. 9

3. 4

4.6

Source: FAO, Trade Yearbook tProduction of iron ore (Fe contents)

Ill. Geographical Pattern of Exports
Seeing that Argentine and Brazilian exports are concentrated on primary
products, it can easily be imagined that their principal trading partners areindustrial nations. Developed countries take up about seventy or eighty percent of their exports, while developing countries about 250/. for Argentine and150/. for Brazilian exports in 1969 and 1970, The share of the Soviet area as a

trading partner is rather small, ranging from 4 to 50/., except in 1965. (SeeTable III-1.) The country-wise distribution of Argentine and Brazilian exports
is somewhat different, although their principal partners are industrial or developed

nations. Argentina's main customers are European countries, such as EEC andthe United Kingdom, while Brazil's largest partner as a single country is theUnited States, in spite of the fact that the importance of EEC has been increasing

FUKUOKAWATA10

and in 1970 the export to EEC exceeded that to the United States. It is, however,quite noteworthy that the relative weight of the United States' market has been

deminishing for both countries under review. (See Table III-2 and 3.)

Argentina's major exports, such as wheat, meat, maize and wool, havetraditionally been absorbed by European industrial countries, but they are competitive with the farm products of the United States ; while Brazilian coffee, cacao

Table III-1 Regional Distribution of Argentine and Brazilian Export (O/o)
1970

1969

1965

1961

Region1. Industria!

Argentina

BrazilArgentina

BrazilArgentina

Brazil

76. 3

78. 3

68. 1

73. 7

61. 9

72. 6

65. 2

73. 7

3. 8

5. 0

6. 2

5. 2

8. 1

6.6

7.9

7. 8

80. 1

83. 3

74. 3

78. 9

70. 0

79. 2

73. 1

81. 5

13. 9

IL 3

18. 7

15. 4

25. 8

15. 2

m.o

13. 6

5.9

5. 4

13. 2

5. 6

4.2

5.6

4. 3

4.8

1oo, O

1oo. O

1oo. O

1oo. O

1oo. O

1oo. O

1oo. O

1oo. O

BrazilArgentina

Countries
2. Non-Industrial

Deve!oped

Countries
3. Developed
Countries(1+2)
4. Developing
Countries
5. Soviet Area

Total (3+4+5)

Source; IMF and IBRD, Direction of Trade
Table III-2 Country-wise Distribution of Argentine andBrazilian

Exports in Value

1961--65

1966-70(millions of U, S. dollars)
1951-55

19ss-60

Country
Argentina

BrazilArgentina

BrazilArgentina

BrazilArgentina

BrazilVV'orld Total

1011

1538

1ooO

1335

1230

1411

1563

2079

u. s.

158

703

113

617

104

510

111

606

U. K.

193

74

229

62

177

59

135

89

EEC

253

312

365

240

as

357

am

565

rs
55
77

27
80

32
ag
98
ss

52
55

37
51

52
79

1oo

122

se
55
82

174

189

M

237

139

104

22
45
86
35
se

154

83

165

119

31

101

31

108

30

156

BLEU
FranceW. Germany
Italy
Netherlands
Other European
Industrial

M

53
71

121

42
ca
112

CountriesJapan
Latin America

31

co

os

185 -

136

140

'
{C,'.geinltina

98
114

Soviet Area
Source:

45

M

112

IMF and IBRD, Direction

36

56

93

139

324

214

61

of Trade

120

75
as

1ss

79

75
78

21

ss
191

107

85

oo

118

BRAZIL:
OF EXPORT TRADE OF ARGENTINAAND
PATTERNS

11

A COMPARATIVE STUDY

and sugar find their largest market in the United States, because the demand
for these Brazilian products in the United States has been very strong. Japan's

weight as their trading partner has been increasing, but the percentage wasstill about 40/. in the 1966-70 period. (See Table III-2 and 3.)
Table III-3 Country-wise Distribution of Argentine and Brazilian Exports (O/o)
1966--70

1961-65

1956-60

1951-55

Country

Argentina

BrazilArgentina

BrazilArgentina

BrazilArgentina

BrazilWorldTotal

100.0

1oo.O

1oo.O

1oo.O

1oo.O

1oo.O

1oo.O

1oo.O

u.s.

15.6

45.8

IL3

46.2

8.4

36.2

7.1

29.!

U.K.
EEC

19.1

4.8

22.9

4.6

14.3

4.2

8.6

4.3

25.0

20.3

36.5

17.9

".5

25.3

38.4

27.2
2.5

BLEU

2,7

1.8

3.2

1.6

4.2

2.6

3.6

France

5.4

5.2

4.4

3.3

4.5

3.6

3.5

3.8

W.Germany

7.6

7.9

9.8

6.4

8.1

8.6

5.2

8.4

Italy

5.3

2.7

8.8

2.6

15.4

4.5

15,2

6.7

Netherlands

5.2

2.8

10.4

3.7

12.5

5.9

10.6

5.7

OtherEuropean

7.1

7.2

3.1

7.6

2.6

7.6

1.4

7.5

Japan

3.1

2.6

2.7

2.5

3.1

2.6

3.6

4.5

LatinAmerica

18.3

8.8

14.0

8.4

15.5

9.9

20.7

10.3

-11.34,4

6.4-7.86.1

5.6-6.18.1

5.6

m7.66.3

6.4

Industrial

Countries

Argentina'
Brazil

-1.4

-3.6

-5.7

-6.0

SovietArea

Source: IMF and IBRD, Direction of Trade
Table III-4

Principal Countries of Destinationof Argentine(millions of U, S.

and Brazilian

Exports

dollars)

Argentina

Brazil

1960

1960

1970

1970

5M

1.

U. K.

221

1.

Italy

271

1. U. S.

1.

u. s.

2.

Netherlands

131

2.

Netherlands

184

2• W. Germany 90

2.

W. Germany236

3.

Italy

128

3.

u. s.

159

3. U. K.

65

3.

Italy

4.

u. s.

92

4.

Brazil139

4. Argentina

56

4.

186

5.

W. Germany 87

5.

U. K.

123

5. Netherlands

52

Argentina
5. Netherlands

6.

Brazil

ss

6.

Japan

109

6. France

as

6.

Japan

145

7,

Chile

7.

W. Germany105

7. Sweden

U. K.

137

Japan

8.

Chile

91

8. Italv

42
39

7.

8.

42
co

8.

110

9.

Belgium

37

9.

Spain

ss

9. Japan31

9,FranceSpain

France37

10. France

70

10• Belgium

25

10. Belgiurn72

Total (1-10)
Percentage of

898

Total Export

83. 2

10.

Source ;U. N.,

Internationat

676
198
154

107

1337

1oo7

2021

75. 5

79. 4

73. 8

Trade Statdstics

12 FUKUO KAWATA
The ranlting of the trading partners of both countries in 1960 and in 1970 isgiven in the Table III4. As for Argentina, the United Kingdom ranked firstin 1960, followed by the Netherlands, Italy, the United States, but in 1970,
Italy came up to the top, the Netherlands held the second place and the UnitedStates the third. The United Kingdom fell to the fifth and West Germany tothe seventh, while Brazil rose from the sixth to the fourth, and Japan from theeighth to the sixth. With regards to Brazil, the United States is by far thelargest customer both in 1960 and in 1970, and West Germany held the second

place in both years. The United Kingdom, which took the third position in
1960, fell to the seventh in 1970. In contrast to the United Kingdom, Italy rosefrom the eighth to the third, and Japan from the ninth to the sixth. Argentina,

the Netherlands, and Belgium respectively kept the same position, but France
sank from the sixth to the eighth.

The total share of the best ten customer countries declined from 830/. to790/o for Argentina, and from 760/. to 740/, for Brazil, signifying a tendency

toward the diversification of trading partners. .
Argentina and Brazil are the leading countries in Latin America, playing
an important part in the regional trade, Both countries are respectively thelargest market of the other country in the region; that is, Brazil is the biggest

market for Argentina and Argentina the largest customer of Brazil in Ldtin

America. For example, in the Latin American Free Trade Association (LAF
TA), Argentine exports to Brazil accounted for 490/. and Brazilian exports toTable III-S Distribution of Argentine and Brazilian Export to LAFTA Countries
in Value (millions of U. S. dollars)
1960
Argentina

Argentina

1968

1965

BrazilArgentina

2.3

7. 6

Brazil82. 8107. 1

Chile

41. 7

Columbia
EquadorMexicoO. 3

Paraguay

8.5

Peru

15. 5

Uruguay

1. 2BrazilArgentina

2.8

Brazil185. 6118. 7
13. 5

15. 8

7.6

138. 6129. 1

53. 4

19. 0

77. 5

23. 3

91. 5

23. 7

7. 1

2. 9

9. 3

2. 0

13. 9

6. 7

L3

O. 2

2. 4

O. 8

11. 2

16. 0

20. 4

O.6

O. 1

Argentina

141. 056. 4

Bolivia

11.6

Brazil

1970

8.9

11. 3

10. 6

2. 3

12. 8

5. 1

15. 1

IL2

O. 4

37. 6

12. 0

57. 8

6.8

31. 7

7.7

12. 9

16. 6

8. 0

11. 2

18. 6

19. 2

28. 1

22. 7

Venezuela

5. 4

1. 3

7. 9

3.2

6. 9

4. 0

12. 6

4.5

LAFTA Total

170. 386. 4246. 6201. 7338. 1

193. 3365. 8290. 8

O. 8

O. 2

6. 7

Source; IMF and IBRD, Direction of Trade

AND BRAZIL:
PAtl'TERNS OF EXPORT TRADE OF ARGENTINA
A COMPARA,TIVE STUDY
Table III-6 Distribution of Argentine and Brazilian Ekport to1960

Country of
Destination

Argentin

Argentina

Brazil

48. 7

Chile

24.5

Columbia
EquadorMexicoO. 2

Paraguay

5. 0

Peru

9. 1

O. 4

Uruguay

7. 6

19. 2

Venezuela

3. 2

LAFTA Total

1oo. O

13. 4

Argentina

Brazil
63. 8

61. 4

21. 7

9. 4

22. 9

12. 1

25. 0

8.1

2. 9

1. 4

2. 8

1. 0

3. 8

2. 3

O. 4

O. 1

O. 7

O.3

4. 3

37. 9

38. 2

O. 2

O.4

Brazi!

4.e

43. 4

BrazilArgentina

O. 6

3. 1

1. 3

Bolivia

1970

1968

69. 9

65. 3

Argentina

LAFTA Countries (O/,)

1965

Brazil

t3

2.7

4. 4

3. 3

5.8

4. 4

7. 0

4. 3

1. 1

3.8

2. 6

4. 2

3.8

15. 2

5. 9

17. 1

3. 5

8. 7

2.6

3.2

5. 6

5.5

9. 9

7.7

7. 8

L5

3. 2

1,6

2. 0

2. 1

3. 4

1. 6

100. 01oo. O

1oo. O

1oo. O

100. 0100. 01oo. O

O. 2

Source: IMF and IBRD, Direction of Trade
Argentina for 650/. in 1970. In later years, the weight of the Brazilian market
for Argentina gradually declined, falling to 380/. in 1968 and in 1970, although it

remained the largest market in LAFTA. The second market is Chile and thethird Peru.

As for the Brazilian trading partneis in LAFTA, Argentina held the foremost
position throughout the years under question. Chile had held the second placesince 1965, although in 1960 she had occupied the third place following Uruguay,

which had held from 1965 till 1970 the third place. It is a quite conspicuous
fact that Mexico, which was negligible for the Brazilian market in 1960, madea remarkable progress in later years, rising to the fourth place in 1970. (SeeTable III-S and 6.)
It can easily be assumed that the primary products exported by Argentina
and Brazil find their market in the developed countries, but the manufactured
products do not easily enter the market of developed nations owing to their lackof competitiveness. Manufactured articles produced by relatively labour inten-

sive methods (SITC 6, for example) are exported to developed countries withmore ease than those commodities produced by relatively capital intensive methods with high technology (for instance, SITC 7). This is quite natural according to the theory,of international trade. It is shown in Table III-7 thatlabour intensive manufactured goods exported by Argentina and Brazil to developed countries account for about 500/o to 600/o of the total exports, while capitalintensive manufactured goods exported to developed countries take up only about
220/. to 260/., about 740/. to 780/. being absorbed by developing countries.

14 FUKUO KAWATA
The primary commodities exported by Argentina are chiefly destined todeveloped countries (mainly European) with the exception of wheat, which ismainly exported to Latin America. It is very interesting that the percentageof the United States market is negligibly small for the major primary exports ofArgentina, such as meat, wheat, maize, fodder, and hides and skins, excepting

wool. (See Table III-8.) The primary products of Brazil are also absorbed
by developed countries, but in contrast to the case of Argentina, the UnitedStates is the largest customer of these commodities except for cotton and iron
Table III-7 Distribution of Argentine and Brazilian Exports to Deve(oped,

Developing and Soviet Area Countries (1968) (O/,)
Commodity

Developed Countries

Developing Countries

Argentina

BrazilArgentina

BrazilArgentina

Brazil

73. 2

83, 4

26. 0

9. 5

O. 9

7.1

os. o

77. 6

12. 4

15. 8

19. 6

6.5

58. 9

89. 4

41. 0

1. 5

O. 3

9. 1

55. 3

68. 2

37, 9

29. 1

7. 0

2.6

58. 8

52. 8

38. 2

45. '

8

O. 3

1. 4

22. 3

26. 0

77. 9

74. 0

28. 6

54. 3

71, 9

43. 5

g

68. 4

79. 4

27. 9

14. 2

SITC O
1
2
3
4
5
6
7
8
9
All Commodities

Soviet Area

6.5

3. 7

Source; U, N., Commodity Trade Statistics
Note: The latest figures available both for Argentina and Brazil are those of 1968.
Figures of 1969 for Brazil are avai!able, but not for Argentina.
Table III-8 Destination of Major Export Primary Cornmodities of Argentina (1968) (O/o)
Oll

041

Region

044

081
F'

tvleat

Wheat

Maize

Developed Countries
u. s,

84,8

28. 5

93. 6

Western Europe

79. 6

28. 3

93. 2

40. 5

25, 5
2. 8

EEC
(
EFTA
Japan
Developing Countries
Latin America
Soviet Area

1. 6

18. 9

odder
98. 5

211
Hides &
Skins

54.0

262

Wool
73. 2

3. 3

16. 6

95. 8

48. 3

49. 2

74. 0

86. 9

36. 1

28. 6

L9

6. 6

3. 4

16. 0

O. 4

3.5

O. 1

2. 4

1.2

8.5

13. 6

71. 1

4. 7

O.9

6. 4

13. 1

6.5

68. 1

4.5

O. 4

5. 3

10. 8

1. 6

O.7

39. 3

13. 8

1. 7

Source: U. N•, Commodity Trade Statistics

AND BRAZIL:
OF EXPORT TRADE OF ARGENTINAPATTERNS

15

A COMPARATIVE STUDY

ore.

(See Table III-9.)
Table III-9 Destinationof Major Export Primary Commodities of Brazil (1969) (O/,)
071. 1061. 1072. 1

Region

Sugar

Cacao

Coffee(raw)

263. 1

281

CottonIron Ore

77. 7

91. 8

Developed Countries
u. s.

87. 3

55. 4

80. 7

44.3

45. 9

78. 4

Western Europe

40. 1

11. 0

3. 6

59. 7

65, O

EEC
{
EFTA

20. 4

10. 4

3. 0

48. 8

54. 3

O. 6

6. 7

9. 8

Japan
Developing Countries
Latin America

O. 6

13. 0

14. 5

4.2

Soviet Area
Source:

13. 4

9. 6

6. 7

9. 1

19. 2

11. 3

3. 0

9, 1

8. 9

4. 8

4.2

6. 0

33, 3

11. 0

3. 9

U. N., Commodity Trade Statistics

rv. Conclusion
It has already been observed that the export values of both Argentina andBrazil were generally stagnant, except the recent remarkable growth of Brazilian
exports. The export values are the products of export prices and export volumes.
It is, therefore, necessary to investigate which factor is chiefly responsible forthe stagnant exports.
In the first place, the indices of export prices and volumes of both countries
are examined based on five year averages. This tells us that the export prices ofboth countries tend to decrease, while their export volumes are increasing. This
Figure 2 Movements of Argentine and Brazilian Export Priceand Export Volume Indices (1963=100)
Brazilian

184

150

16s Bt16oXxe.,f,l,:'eh7?1"g`-.'itfi6ff-•

100

Xvt"Å~ -- h-t-.x.
/Argen?l/\n'e-Exp'ort

50'-

azilian Ex - ' - ' -" Argentine
PObt Price lndiees

eExp,.t".xtt;eiiftlld'.f.,".dgceii

83N

Export .Price Indices

Argentine Exp6rt Price Indices""""-'-'--- Brazilian---------------

.

.--t-

--x'-7'!.-...--.-.N-1-s

Export Volume Indices
Export Volume Inaices.t' .135
133

f. '-------(-.--.-;g.>ii-,,"'

t103

Volume lndices

54N '
x!
v
36

1951 52

53 54 55 56 57 58 59 60 61 62 63 64 !Lt5- 66 67 68 69 70

Year

FUKUO KAWATA

16

is an important finding. (See Table IV-1. See also Fig. 2.)

To measure the movement more exactly the linear regression equation(Y==a+bX) is applied by using the least square methods, where Y stands forthe export price or volume, X denotes years. The results of this calculation are

shown in Table IV-2.
As for the movement of the export price, both countries show a downward
trend. The absolute value of b is largest in the case of Brazil if we include
coffee, and smallest in the case whenwe exclude coffee. This means the Brazilian

export price has a stronger downward tendency than the Argentine one whencoffee is included, but when coffee is excluded, the downward tendency is weaker

than the Argentine one. The coeMcient of variation of the export price issmaller in Argentina than in Brazil.

As far as the export volume is concerned, both countries show an upward'
Table IV-1 Movement of Export Price and Volume Indices in Argentina

and Brazil (1951-1970) (1963=100)
1951--55

1953-55

1956-60

1961-65

1966-70

Export Price:Argentina

135

(124)

105

103

Brazil (ind. Coffee)

163

(163)

127

111

120

Brazil (excl. Coffee)

143

(122)

121

105

114

Export Volume:
Argentina

55

(61)

70

92

Brazil (incl. Coffee)

74

(73)

80

90

114

Brazil (excl. Coffee)

56

(62)

67

101

160

Source: IMF, International Financial Statistics

Note: Indices of export price and volume after 1966 are not available for Argentina.

Table IV-2 Linear Regression Equation (Y= a+bX) of Export Priceand Volume lndices for Argentina and Brazil (1963=100)
Price and Volume

PeriodabStandard Arithnietical
Error
Mean

CoeMcientof Variation

Export price:Argentina

1953-1os5

214. 27-1. 789

8. 83

108. 72

Brazil (incl. Coffee)

1953-1970

276. 95-2. 444

17. 26126. 65

O. 14

Brazil (excl. Coffee)

1953--1970

172. 94-O. 946

IL 84

114. 77

O. 10

Industrial Countries

1953--1970

49. 88

O. 8572. 93

102. 56

O. 03

Export volume:
Argentina

1953-1ee5-139. 43

3. 663

7. 19

76. 70O. 09

Brazil (incl. Coffee)

1953-1970-108. 97

3. 271'8. 74

92. 22o. co

Brazil (excl. Coffee)

1953-1970-378. 84

7. 811

18. 01101. 54

O. 18

O. 08

(Note)

Source: IMF, Internationat Fittancial Statisitcs

17
PAT"1'ERNS OF EXPORT TRADE OF ARGENTINA AND BRAZIL:
A COMPARATIVE STUDY

tendency, with b positive. The value ofb is largest in the case we exclude
coffee and smallest in the case we include coffee in Brazil. The Brazilian export

volume excluding coffee tends to increase with more than twice the rapidity as

against the Argentine one, but including coffee, the Brazilian export volume
increases more slowly than the Argentine one.
The coeMcient of variation of the export volume is the same for both Argentina and Brazil if we include coffee, but when coffee is excluded, the Brazilian

figure is twice as high as the Argentine one. To sum up, it can be coneluded
that the main cause of the exports stagnation of both countries consists not in thetrend of the export volume but in that of the export price.

It is to be noted that the trend of the export price of industrial countries

shows an upward tendency with b positive, in spite of the downward movementof the Argentine and Brazilian export prices. This is one of the important reasons

why developing countries are making every effort'

to promote industrialization.

ENTREPRENEURSHIP IN AMERICA
Tadakatsu INouE
On November 9 and 10, 1969, the Business History Society of Japan held
its fourth annual meeting at the University of Osaka. While the first day had
twelve reports on "free topics" including "Ironmasters in the British Iron andSteel Industry during the Industrial Revolution" by Professor Alan Birch of
the University of Hong Kong, the meeting on the second day was devoted to thetheme "International Comparisons on Entrepreneurship" which was the "common topic" of the conference. Following the introductory address made by
Shinzo Kurita of Kobe University of Commerce, four papers were read before
the 100 participants: "The Stagnation of the English Economy and Entrepreneurship" by Professor Seiji Arai of Kansai University, "Entrepreneurship in
America" by the present writer, "Entrepreneurship Qualities in India and China"

by Professor Keiichiro Nakagawa of the University of Tokyo and Professor
Y6 Ten6 of Kyushu University of Industry, and "Entrepreneurship in Japan"
by Professor Kisoo Tasugi of the University of Kyoto. After reading the reports, we went into a panel discussion on the above subject with Professor Mataji

Miyamoto of the University of Osaka in the chair.

The following is a r6sum6 of the paper read by the writer at the meeting
within a time limit of fifty minutes.
I.

To begin with, the writer gives two notices. First, he intends to define
the subject imposed upon him as "American Entrepreneurship in the Era of the
Nineteenth and Early Twentieth Centuries." The reason why the writer limits
the scope of reference to the United States especially before the Great Depressionis wholly convenient, as he has not yet fu11y understood those changes in businessin recent decades that seem to have marked a radical break with the past.

Second, the writer proceeds on the basis of the common understanding
among the six reporters that the varying behavior of businessmen in England,
India, China, Japan, and America cannot be accounted for in terms of economic
factors alone. As Professor Arthur H. Cole says: "While economic conditions
may define the (entrepreneurial) problem for the entrepreneurial actors, they
do not necessarily decide it." "The latitude of potential, even of likely action,

for the entrepreneur is considerable." It is not surprising, thus, that a NorthTADAKATSU INOUE

20

American turning to the study of Latin American entrepreneurial behavior should
be strongly impressed by an entrepreneur of that area who "could sit on a moun-tain of iron ore - and go to sleep!"(') Then why did the businessman behave
as he did? Or why did he operate in a manner different from his counterpart inother countries. In seeking the explanation about observable national differencesin entrepreneurial activity, we cannot overlook the operation of compound socialand cultural factors.

ll.

It may safely be said that in the classic era of the nineteenth and early twentieth centuries American society was one whose habits and values uniquely favoredto the growth and development of business. Although the influence of such elements can be seen operating in every entrepreneurial aspect, the most significant

is the fact that the social structure of America not only encouraged the flow of

the ablest members of the society into business careers, but also led them todevote themselves to business activity in a certain manner.
For understanding the effects of American cultural traditions on entrepre-

neurial recruitment, comparison with what has taken place in other nations
will be effective. For example, in an essay, "Cultural Factors in Economic
Growth," Professor Thomas C. Cochran describes the situation in Latin America
as follows:

The Latin American strives more for status not based on businesssuccess. This may be a disappearing vestige of agrarian aristocracy, but
in Latin America it remains strong. Artistic achievement, professional
status, land ownership, and government or military oMce still outrank
anything short of outstanding business success. In Mexico "the best men
go into the professions and those who do not, no matter how good theirreasons, are always aware that they are considered professionally inferior."(2)Professor John E. Sawyer finds a similar situation in France:

The persistence of diffused feudal values and goals has meant thatbusiness has not been the "natural" choice of those enjoying the greatest
advantages, either of birth or of talent and training. In so far as an occupa( 1 ) Arthur H. Cole, Business Enterprise in Its Social Setting, 1959, pp. 19-20.
( 2 ) 'I homas C. Cochran, "Cultural Factors in Economic Growth," in Hugh G. J, Aitken, ed•,
Explorations in Enterprise, 196S, p. 126.

ENTREPRENEURSHIP IN AMERICA 21
tion was in order at all, the ablest tended to follow the well born into careers
in the elite services, diplomat and military, the ranking ciyil service positions

like finance, or the professions, politics, journalism, the arts.(S} .'By contrast to their counterparts in these countries, Arnerican entrepreneursin general have never been ranked below such social figures as the clergy, thesoldiers, the teachers, and the professional men as a whole. Over the classic
period, business had a seeure and honorable place in American life, and entrepreneurs enjoyed the highest level of prestige. It is unquestionable that thehigh occupational status of American entrepreneurs drew the talents of the society

toward business.

The high social ranking of American entrepreneurs may be ascribed tocertain factors in American society. Most striking is the general absence of
feudal survivals. In America the beliefs and values of the medieval world, includ-ing the tradition of regarding business with contempt, never passed into thesociety. From the beginning of the American settlement, no social stigma was
attached to engaging in any legal activity to acquire personal wealth. At thesame time, because of the relative absence of hereditary privilege and prestige,
businessmen did not face strong and repressive competition from titled nobility

in the struggle for social eminence. For most Americans, business was thebroadest and shortest path to public recognition and high social status.
Similarly, the important factor suhich led to the highei occupational plaeeof business was the Calvinistic or Puritan tradition in America. Whereas else-

where in the Western world Puritanism had to contend with long establishedtraditions such as Catholicism, monarchism, aristocratism, in America it had arelatively clear sweep of the field.

The special achievement of the Puritan tradition was to give a religious
sanction to occupational effort as a value. According to the doctrine, the world
exists to serve the clarification of God and for that purpose alone. For everyone,

without exception, God's Providence has prepared a calling, which he shouldfind and in which he should work. In doing so, the individual is working for the
divine glory. Waste of time is thus the first and the deadliest of sins in principle.

Time is infinitely valuable because every hour lost is lost to work for the gloryof God. Similarly, the money made should not be wasted on extravagant ostentatious living. After allotting the church its share, the remainder should be usedin furthering usefu1 ventures which are also God's. The real moral objection
is to the enjoyment of wealth with the consequence of distraction from the pursuit( 3 ) John E. Sawyer, "The Entrepreneur and the Social Order," in William Miller, ed., Men
in Business, 1952, p. 14•

TADAKATSU INOUE

22

of a righteous life. In other words, acquisition of wealth is bad only when it issought for the purpose of obtaining pleasure. But, as a performance of duty
in a calling, it is riot only morally permissible, but actually enjoined. As Max

Weber remarked in his essay, "Die protestantische Ethik und der Geist desKapitalismus" (The Protestant Ethic and the Spirit of Capitalism), these doctrines

were to give birth to the spirit of capitalism.
According to Weber, the spirit of capitalism is shown with almost classicalpurity in the writings of Benjamin Franklin. After quoting the sentences extracted from Franklin's Hints to Those That vaould Be Rich (1736) and Adwice

to a Young Tradesman (1748), Weber summed up Franklin's moral attitudes
as follows:

The peculiarity of this philosophy of avarice appears to be the idealof the honest man of recognized credit, and above all the idea of a duty of
the individual toward the increase of his capital, which is assumed as an
end in itself. Truly what is here preached is not simply a means of making
one's way in the world, but a peculiar ethic. The infraction of its rules
is treated not as foolishness but as forgetfulness of duty. That is the essenceof the matter. It is not mere business astuteness, that sort of thing is com-mon enough, it is an ethos.(4)Franklin's ethic called forth the applause of a whole people. In fact, hispoor Richard's Almanac, the little spaces of which were fi11ed by proverbial
sentences chiefiy on industry and frugality as the means of procuring wealthand thereby securing virtue, was published annually 1732 to 1756. It was abestseller of the time. Needless to say, in a society bound to the conceptionof money-making as an end in itself, the businessman was assured self-confidence
in the importance and primacy of his work.

llI.
The higher occupational place of business in America was not the only
factor that drew the talents in the society toward this occupation. It should
be noted that such a trend was strengthened by the presence of opportunities forany able individual to achieve a measure of economic independence. In fact,
America in the classic era of the nineteenth and early twentieth centuries was theland pre-eminently where the ideal of equality of economic opportunity flourished.
(4) Ta!cott Parsons, Translation, 1930, p. 51.

ENTREPRENEURSHIP IN AMERICAFirst, as Frederick Jackson Turner and his disciples explained in their
theory of a moving frontier, the underprivileged in the more settled zones could

begin life anew as pioneering farmers, because there were present in America
great reaches of arable land which were virtually free for taking. While thecapitalist farmers of the West were not recruited from the industrial workersof the East, but supplied from the farming class of contiguous states and Europe,

there is no doubt that the existence of the moving frontier made it possible
for the unsuccessfu1 small farmers and their sons to fi11 up the West without
having been converted easily into industrial workers. These opportunities were
found in the American West throughout the whole of the nineteenth centry and,in considerable measure, up to the end of World War I.
Second, as Louis M. Hacker pointed out in his The Triumph qf American
Capitalism, during the seventeenth and eighteenth centuries opportunities forindustrial production except in limited fields were closed to Americans becauseof the mercantilist system imposed by England upon the American colonies.
Thus, when the thirteen States freed themselves frorn such fetters and took steps
toward their industrialization, all the future industrial capitalists virtually lined

up at the same starting point.
Third, unlike in Russia, China, India, and many Latin American countries,
European capital played a relatively minor role in the United States in building
her indsutrial production, though it helped lay down her railroad network. Thus,
in industrial production, opportunities existed for men of smalt means.

The reality of equality of economic opportunity in America is best shownby the fact that the annals of American business leaders are fi11ed with the stori-

es of those who, starting obscurely, made immense fortunes. Recent researches
have indicated that the American industrial elite of humble origins were less thanwe expected. It is certain, however, that almost all of them went up the laddersof the economic world by their own efforts, even if they were not of humble
origin.

For example, Cornelius Vanderbilt of the New York Central System, whodied worth a hundred million dollarsi started his. career as a boatman of theport of New York. Andrew Carnegie, from an utterly-penniless immigrant family, became a bobbin boy at the age of thirteen. John D. Rockefeller was the sonof a peddler of patent medicines. Such was the case with H. C. Frick, G. F.
Swift, and Henry Ford. Needless to say, these mefi, giving tangible proof ofthe reality of equality of economic opportunity, encouraged the flow of the ablest

members of the society into business careers.

23

TADAKATSU INOUE

24

rv.

In the United States before the Great Depression the ablest not only aspired

to be businessmen but also devoted themselves to business activity. Don't takethe dedication of businessmen to business activity as a matter of course, for it

was not always true in other countries. For example, Latin-American entrepreneurs had a tendency to divert their resources to achieving prominence inmore prestigious fields. In the essay as mentioned above, Professor Cochrangives an example:
One of the most important Argentinian entrepreneurs, a man unusuallyengrossed in his business, took the time to study for and achieve an engineer-ing degree at the University, subsequently held an associate professorshipand developed a large estancia, all during the most active years of his business career.(5)A tendency similar to this is found in European countries. Quoting an
essay of Professor Tibor de Scitovszky, Professor Arthur H. Cole states in his
Bust'ness Enterprise in Its Social Setting:...in Europe, especially England,..,"the existence of a feudal aristocracy
and landed gentry set a social pattern, which to achieve was the ambitionof the newly rising capitalist [entrepreneurial] class." The British entre-

preneur of the nineteenth century "wanted to outdo his rivals, not in thescale of his business or wealth, but by being admitted to high society andby becoming a member of Parliament or alderman in his native town. Suchambitions restrained the ruthlessness of industrial warfare and diverted agood deal of time, energy, and money from business."{e)Unlike the businessman in these countries, the American businessman
devoted himself to making profits, defeating his competitors, and increasing
the output or productivity of his enterprise. In fact, he was so constantly absorb-

ed in business activity that he often neglected his physique, his literary andartistic accomplishment, and his civic duties. But, in the United States, he lost
little prestige through the absence of general cultivation•

The dedication of the American businessman to business activity may be(5) T. C. Cochran, op. cit., p. 126.
(6) A. H. Cole, oP. cit., p. 105.

ENTREPRENEURSHIPIN
AMERICA25

explained by about the same factors as the writer pointed to concerning therecruitment of businessmen in this country. First, the United States not only

skipped the stage of feudalism but also achieved her independence according
to the values of the Enlightenment which were in opposition to those of feudalism.

In this country, therefore, birth and blood were never regarded as determining

social status, which, on the contrary, must be acquired by achieving worldy

success. This seems to have made the American businessman more devoted
to his business, than his counterpart in countries with feudal residues. Second,

American society was so strongly influenced by Puritan teachings that there
arose a religious sanction to occupational efforts as a value. Within such asociety, as Prof. F. X. Sutton and others note in their The American Business
Creed, the American businessman had no need of making apologies for a narrow,specialized existence fi11ed with the care of producing and distributing material

goods.(7) And, lastly, the reality of equality of economic opportunity musthave been a strong incentive for the American businessman to devote himself
to business activity.

v.
It should be noted that, while the American businessman devoted his fu11energy to business activity, he did so in certain ways. First of all he was neverafraid of deviant behavior in Prof. T. C. Cochran's termihology{8) or innova-

tion in Prof. J. A. Schumpeter's. Thus, as Prof. J. E. Sawyer said in the
essay mentioned above, the United States before the Great Depression provided"an instance of something like a golden age of Schumpeterian entrepreneurship."(">
In fact we can easily list names of entrepreneurs who would belong to this category :Eli Whitney and Simeon North who progressed toward making guns from massproduced lnterchangeable parts; Francis Cabot Lowell who founded a new
type of cotton textile mill by memorizing the construction of the power loom whileon a trip to England; Cyrus Hall McCorrnick who invented and improved the
McCormick reaper, took it west to Illinois, and dominated the farm imp!ementbusiness; Alexander Turney Stewart, Rowland H. Macy, and John Wanamaker
whose innovations in retail business were responsible for the rise and developmentof the department store; John D. Rockefeller and his partners who developed

a new and at that time unique system of management which enabled them to(7)(8)

T. C. Cochran, "Role and Saction in American Entrepreneurial History," H. G. J.

(9)Aitken, ed., op. cit., pp. 93-95•
J• E. Sawyer, op. cit., p. 11.

F. X. Sutton and others, The American Bust'ness Creed, 1959, p. 277.

TADAKATSU INOUE

26

manage effectively the huge Standard Oil combination; and, of course, Henry

Ford was the pioneer in introducing and developing mass-production methods
in the automobile industry,
While the innovation initiates new ways of doing things, it is the imitator
who is responsible for the spread of such new ways from one location to others,

from industry to industry, and from plant to plant. The United States was alsofavored with this type of entrepreneur. To cite one example: the reason why
the oil refining industry which started immediately after Drake's discovery ofoil in 1859 fell into overproduction as early as the late 1860's was that, attracted

by the profits, so many businessmen rushed to build refineries. The capacity
then temporarily exceeded the ever•-growing demand for the new lighting fluid.
Needless to say, all aggressive entrepreneurs were not successfu1 in theirventures. There must be a number of entrepreneurs who failed, but failure
was not necessarily taken seriously. Seeking their comebacks, they spared nopains to work for someone else until they had saved enough to try again. Cit-

ing a case of R. H. Macy who failed several times before he succeeded in New
York, Prof. T. C. Cochran writes:
The entrepreneurial vigor created by American resources and American
culture has been demonstrated not in unusual acumen or an extraordinary
ratio of success to failure, but in a persistent quest for profit-making enterPrise.(lo)The American businessman proved himself highly innovative, aggressive,and undaunted on the one side. On the other, he was prudent, industiious andfrugal. Take as an example John D. Rockefeller. In 1863, when oil refining
was still a gambler's business, he became a partner in a Cleveland firm to starta refinery. He was so fully convinced of the future of oil refining that he labor-

ed for a rapid expansion of the firm. At the same time, however, he paid carefulattention to every detail of operations. Even The History of Standard Oil Compaay by Ida M. Tarbell, one of Rockefeller's many critics, contains such statement as follows:

From the start his
He had the frugal man's(John D. Rockefeller's) effect was tremendous.
hatred of waste and disorder, of middlemen andunnecessary manipulation,and he began a vigorous elimination of these fromhis business.(n)
(1O)
(11)

T. C. Cochran,Ida M. Tarbell,

Basic History of American Btesiness, 1959, p. 56•
The History of Standard Oil Compan.v, 1904, I, p. 43.

ENTREPRENEURSHIP IN nmERICA 27
The behavior of the American businessman, which can be characterized
as both dynamic and careful, may be attributed to the various factors statedabove. The geographical factor seems to have a particularly close relationshipto the aggressive side and the religious factor to the prudent side of American

entrepreneurship. While we shall have no need of explanation on the latter,
we sha11 need some comments on the former. But it will be sudicient to saythat the moving frontier of the vast virgin land formed among Americans a nearly

universal sanction for such behavior as expressed by the terms, "adventure,pioneer, and boldness." These qualities characterize the brand of aggressive

entrepreneurship which developed in America. •GENERALIZATION OF TWO-GAP THEORY
Hikoji KrtTANo

I. introduction
1. 0ne of the main conclusions presented by two-gap theory which has beendeveloped on macro-economic level is:"Net capital inflow requirement of a developing country from abroad is equal

to the major element among ex-ante resource-gap and ex-ante trade-gap."(1) L == max [I - S, M- E](i,IIn.efl,to.w:.,a,PilltaA,)(g.!I'l]i:lllllgiiillES]Ve.S,tm,.e.",`,),-(GSa.V,')"gS)(.dw'P.O,rt.Sd),-(GEIi)OrtS)

Depending on this conclusion, the two-gap theory has presented the following
policy measures to adjust difference between two-gaps.
(a) Case I, in which ex-ante resource-gap is major elements. In this case,

L==l-S.
And if this required amount of net capital inflow is supplied from abroad, thedeveloping country may increase imports, then the difference between two-gaps

can be closed.

(2) M*==L+EIM(Z•%'pPgS,{,) (t•x-pa.n.te,)(b) Case II, in which ex-ante trade-gap is major element. In this case,

L==M-E.
And, if the required amount of net capital inflow is supplied from abroad, thedeveloping country may decrease savings, then the difference between two-gaps
can be closed.

(3) S*==l-L$S(g:u{x,sg) (g:-q.n,tg)
These sub-conclusions suggest the adjustors to be selected for respective
cases. But the two-gap theory considers only irhports (to be increased) for
Case I and savings (to be decreased) for case II, but not investment (to be de-creased) for Case I and exports (to be increased) for Case II. This is due tothe following reasons:(i) Investment should not be an adjustor, because the economic growth is assumed
to be kept at a desired rate in this theory.

30 HIKOJI KATANO(ii) Exports can not be an adjustor, because this theory assumes that the exports
is maintained at the highest level of growth rate as well as possible in the country.

'
2. The two-gap theory does not declare its economic meanings satisfactorily.

Supplementing to this theory, we consider the following two relations:(4) X i I, + C, +E(RrOoMdfiSitllCon)(BGv.,r,ODdS.So.mi,"eg:iSctment)(BCy,O.ndDS."o.Mm,Pe`,itOi.")(EXPO'tS)(5) M == I- + C-

(Imports)(bGyrols.spl.n,vte,stment)(gyonls.u:;8rtti,On)

Combining these two relations, the two-gap relation is generated.

(6) I-SiM-E
From these relations, we have further economic meanings inhibited behind thetwo-gap theory. '(1) The resource-gap majority case (Case I) is generated when
there is an over-production of domestic product.
(2) The trade-gap majority case (Case II) is generated when
there is an under-production of domestic product.

3. These conclusions make clear the economic meanings of policy measures
for adjustment proposed by the two-gap theory. As the resource-gap majority
case is generated in under-production situation, if a net capital inflow fromabroad required is provided by the other countries, the net capital inflow can beused for importing a certain amount of commodities from abroad, and the demandcan be fi11ed. In this case, when the imports contain capital goods, this makes
productive capacity to be increased, and, then, the ex-ante resource-gap has tobe decreased.

As the trade-gap majority case is caused by over-production situation, if
a net capital inflow from abroad required is financed by the other countries, thenet capital inflow takes a place for a part of domestic savings. This decreasein domestic savings helps to make balance between two-gaps. While the replacedpart of domestic savings can, in turn, play to increase domestic consumption
demand for excess-products.

4. These are concerned with the conclusions proposed by the two-gap theory
to be developed in macro-economic level. However, we are not sure whether
these conclusions can be still effective and true directions for practical economic

growth process of the developing country or not. Because we are not sure

GENERALIZATION OF TWO-GAP THEORY
whether these conclusions reduced in macro-economic level can be still effective
for multi-sectoral considerations or not. So we attempt, in this paper, to examine
the plausibility of these conclusions in multi-sectoral model of two•-gap theory.

We shall expect rather negative plausibility of these conclusions in multi-

sectoral model of two-gap theory. Each individual industry has its own patternof commodity balance sheet. And the patterns of industries are different fromeach other; production of a industry is to be supported by imports for fi11ing
domestic use and production of the other industry needs either to increase its
domestic use or to expand exports of the products. Thus the adjustment problem
should be considered through commodity balance sheet by industry or by com-modity. This refuses the adjustment problem to be considered in macro-economic level, because the macro-economic considerations are concerned only withnet balance elements of all commodity balance sheets as a whole of the economy.

5. In addition to the multi-sectoral reformulation of two-gap theory we
examine, in this paper, the adjustment problem presented by the conventional

two-gap theory. The conventional two•-gap theory considers adjustors to beimports for resource-gap majority case and savings for trade-gap majority case.

We consider no objections in the resource-gap majority case. However, in the
trade-gap majority case, we should reexamine the adjustment process throughdecrease in domestic savings. The trade-gap majority case is generated inover-production situation. But, as the economy is required to grow at a certain

rate, we can not expect to decrease investment growth. Exports is considered
to be expanded at the highest rate. After all, the conventional two-gap theory
should consider domestic savings to be adjustor in this case.

This adjustment is, naturally, to be supported by net capital inflow fromabroad as a part of economic aid to the developing country. However,- weconsider that the economic aid should contribute to increase the welfare level

through improvement of industrial structure of the developing country. Thismeans that the economic aid should not be used for direct inciease in national

welfare level without any round-about expansion of productive capacity. If adeveloping country may have exce.ss products over domestic use, these excess
products should be directed to exports, when the gains from exports should be

used for expanding the productive capacity. The conventional two-gap theory,
assuming the situation that exports of a developing country are kept at the largest
extent as well as possible and can not expect its further expansion by itself, hasbeen forced to assume savings as adjustor for the trade-gap majority case.
However, when the developed countries can increase their imports from thedeveloping countries by any means (for example, through the special preference31

H!KOJI KATANO

32

and the other trade policies), the adjustment problem takes a different phase inwhich exports may be increased by the help of developed countries. This sortof adjustment is not followed from the net capital inflow from abroad. But weconsider this sort of adjustment to be accompanied by a sort of economic aid tohelp export expansion of the developing countries. Thus, we consider, the net
capital inflow is effective for the resource-gap majority case, and the economicaid (for example, the special preference) to expand export of the developing
countries is effective for the trade-gap majority case.

n. Model Construction
6. We consider, here, two kinds of industries, that are expert expanding induStry

and import substituting industry. This is the minimum requirement to develop
the two-gap theory in multi-sectoral model. The export expanding industry
is the industry in which there is an excess product over domestic use and tradi-tional exports. And the import substituting industry is the industry in which

products of the industry can not fi11 domestic use and imports is needed forfi11ing the shortage. These definitions are specified only for the developing
countries, but not necessarily true for the developed countries. In the developed

economy in which a foundation of industry is well performed, whether a commodity is to be domestically produced or not depends on a future change in com-parative advantage of the commodity. But, in the developing economy in which
a foundation of industry is not well performed yet, whether a commodity is tobe domestically produced or not depends on the economy's decision how toorganize the industrial structure in the future. For the developing economy,
the structure of comparative advantages should be improved along the national

plan of industrialization. However, all of the imported commodities of thedeveloping economy are not necessary to be substituted by domestic production.
Some of the commodities are to be left as imported goods so far. In this paper,

we are assuming only two kinds of industries (the export expanding and theimport substituting industries), so we define the import substituting industry
to be the industry in which a part of products is imported.

7. We specify the i-th industry to belong to the export expanding industry
A, and the1'-th industry to belong to the import substituting industry B. Considering the characters of these respective industries, we have the relations(7) E,SX,+M,-D,=•E,* iEA,(8) Ei>..,Xj+Mi-Di=Ej* jEB,
where E* stands for exportable surplus, which is exce.ss supply of domestic

GENERALIZATION OF TWO-GAP THEORY 33
product and import over domestic use.
In the export expanding industry, as equation (1) shows, realized exports
are smaller than exportable surplus. When the exportable surplus is larger than

the realized exports, if exports can not be further expanded and productionlevel of the exporting commodity can not be reduced, the commodity balance
between demand and supply can be realized only through increase in domestic
consumption caused by decrease in domestic savings. This adjustment does
necessarily need• a $upport through net capital infiow from abroad. However,when the developed countries might give the developing country more market
to absorb the country's exportable surplus, the exports of the country could be

expanded, and the commodity balance could be realized. This sort of alienationof market should be considered as a part of economic aid to the developing

countries in place of capital aid. In the import substituting industry, as equation (2) shows, realized exports

are larger than exportable surplus. But the expression of equation (2) is inrelation to the expression of equation (1). Acrually, this sort of situation should

be considered as a situation in which realized exports are zero and exportablesurplus takes negative value.

(8*) O>=Xi+Mj-Dj=Ej*
For the commodity that is produced in the import substituting industry, thedomestic use is always larger than the domestic product, and the commodity
balance is realized by more imports supported by net capital inflow from theother countries.

Ill.' Amount of Aid Requirement'

8. As we have shown above, there is a surplus of domestic product over domestic
use in the export expanding industry, and the product of the import substituting

industry comes short of domestic use, These respective situations decideamount of aid requirement in the corresponding industries. ' ' '''9. At the first stage of our arguments, we assume that the exports of productsof the export expanding industries can not be expected to further increase, andthe level of production should not be decreased. In this case, the commodity
balance can be realized only through decrease in domestic savings and increasein domestic use of the comrnodities concerned. However, for this sort of ad-

justment, the developing country needs the following amount of net capital

inflowfrom abroad: ' •(9) ZIL,==Z[(M,-E,)-(D,-X,)]+Zl(1,-S,), iEA,

HIKOJI KATANO

34

wheie the first term on the right side shows the requirement to decrease domestic

savings or to increase domestic use of export expanding commodities, and thesecond term shows the net capital inflow requirement due to the resource-gap
component of the export expanding industries.

As we have an identity

D,-X,!J,-S,,
the equation (9) becomes(9*) ZL,=Z(M,-E,).
This stands for the trade-gap component of the export expanding industries.
And the relation (9*) shows the two-•gap thesis of net capital inflow requirementin the trade•-gap ma.iority case.

l,S,M,E

SxlI-S>M-E-.

I

sl-S<M=E
E

Mx

M-----""'---'

M

E

o ''

t

Figure 1

In order to make better explanation of the relation (9), we should consider
the factors to decide the net capital infiow requirement as follows: the fundamental factor to decide the net capital inflow requirement is always the resourcegap. This part is shown by the second term of the right side of the relation (9).

The basic idea of this sort of consideration is to cover the short of investment

over domestic savings by introducing net capital inflow from abi'oad. However,in the trade-gap majority case in which there is a surplus of domestic productover domestic use, the short of foreign exchange to finance minimum importrequirement over export earning is larger than the resource-gap, and this partshould be financed by tbe net capital inflow from abroad, in addition to the net

capital inflow requirement to be equal to the resource-gap. This part is shownby the first term of the right side of the relation (9). As mentioned above, in
addition to the net capital inflow to be equal to the resource-gap, if the developing

country can expect to receive the net capital inflow to be equal to the first termof the right side of the relation (9), the country can decrease its domestic savings

GENERALIZATION OF TWO-GAP THEORY 35
by the same amount, and increase its domestic use of commodities, then realize
the commodity balance in the ex-post situation.

10. In the import substituting industry, on the other, the domestic productcan not satisfy the domestic use. Then the short of domestic product over thedomestic use should be supported by import that is financed by the net capital
inflow. This adjustment needs the following amount of net capital inflow fromabroad:(10) ZLi=Z(Ii-Si)-Z[(Ii-Si)-(Mj-Ej)]+Z(MrEi), jEB.
The net capital inflow requirement of the import substituting industry is equal

to the resource-gap. For this case, the two-gap thesis is true in the originalform. However, we should notice here that the resource-gap consists of boththe part required for realizing commodity balances (the first term of the rightside of the relation (10)) and the part to bc equal to the short of foreign exchange

to finance minimum import requirement over export earning (the second termof the right side of the relation (10)).

11. Thus, for the developing country concerned, total amount of net capital
inflow requirement from abroad is(11) ZL,+ZLj--Z(M,-E,)+Z](IrSj), iEA,jGB.
This is the grand total of the total of trade-gap components of the export expanding industries and the total of resource-gap components of the import substituting
industries.

While the conventional two-gap theory has proposed that the net capital
inflow requirement as a whole of the economy should be the major element among
the resource-gap and the trade-gap, that is(12) L*=max[X(I,-S,)+Z(Ij-Si), Z(M,--E,)+Z(Mj-Ei)],
iGA, 1'EB.
Total amount of net capital inflow requirement shown by the relation (11)does not always equal to the total amount shown by the relation (12). If allindustries of the developing country are either the export expanding industry
or the import substituting industry, these two values of total amounts shouldbe equalized. But, if not, the value of the relation (11) is always larger than thevalue of the relation (12).

(ii) L*-zL,+zL,(8E.A.•,,Åë.:l2(14) L*<ZL,+XLb iEA,1'EB
No more explanations are needed for the relation (13). When all industries are

HIKOJI KATANO

36

the export expanding industries, the total amount of net capital infiow require-ment as a whole of the economy equals the total of the trade-gap components.
While, if all industries are the import substituting industries, the total amount of

net capital inflow requirement becomes the total of the resource-gap components.
For the relation (14), the proof can be given as follows: when the resource•-

gap is larger thqn the trade-gap as a whole of the economy,Z(I,-S,)+Z(I,-Si)>Z(M,-E,)+Z(Mj-E,),
the relation (12) becomes

L*=E(I,-S,)+Z(Ij-Sj).
On the other hand, the relatiQn (11) requires' XL,+ZL,=Z(M,-E,)+Z(I,-S,)•
From these two relations, we have

(ZL,+ Z] Li)-L*- Z(M,- E,)- Z(I,- S,),
where Z(Mi-Ei) is the trade-gap component of the expott expanding industry
and Z(Ii-Si) is the resource-gap component of the same industry. By definition,Z(M,-E,)>Z(I,-S,).
Thus we have

ZL,+ZLj>L*.
When the resource-gap is smaller than the trade-gap as a whole of the economy,

Z(I,"S,)+Z(Ij-Sj)<Z(M,-E,)+(Mj-Ei),
the relation (12) takes the form

L*==Z(M,-E,)+Z(Mi-Ej).
While, the relation (11) requires

ZL,+ZLj -- Zl (M,-E,)+Z(Ij- Si).
From these twe relations, we have

(ZL,+ZLi)-L* =:Z(Ii-Sj)-Z(Mj--Ej),
whereZ(Ii -. -Si)is the resource-gap component of the import substituting industry

and Z(Mi-Ej) is the trade-gap component of the same industry. And, by
definitioni

Z(I,-S,)>Z(M,-E,).
Thus we have

ZL,+ZLj>L*.
As mentioned above, iri both the trade-gap majority case and the resource-gap
majority case as a whole of the economy, the relation (14) can be true.

12. For any developing country, if may be not plausible that all industries of
the country are elther the export expanding industries or the import substituting

industries. However, the conventional two-gap theory has assumed this sort

GENERALIZATION OF TWO-GAP THEORY
of implausible situation. Thus the two-gap theory should be reconstructedin multi-sectoral level in which both the export expanding industry and the importsubstituting industry are included. The net capital inflow requirement proposedby the conventional two-gap theory is necessarily smaller than the actual net
capital inflow requirement.

rv. Numerical Example
13. Now, let us consider a simple numerical example. We consider four indus-•
tries. Each industry produces
only one kind of commodity. And we assume
the commodity balances of respective industries, as shown by Table 1.

Table 1
Commodity Balance Sheet(Case I)

Industry E E* X M D
1 2< 4= 10 +2 -- 8
2 1< 2= 8+ 2-8
3 O> -1 = 5+ 6- 12
4 O>-3 == 4+ 8- 15z(Case II)

1
2

3
4

3> 2= + 18 -- 43
2< 4= +2-8
1< 2= +2-8
1< 3= + 6 -- 12
O> -3 = 4 + 8- 15
27
10
8
8

Z 4< 5= 30 + 18 - 43

On the macro-economic level, Case I stands for the resource-gap majority case,and Case II shows the trade-gap majority case. And, on the sectoral level, thedifference between Case I and Case II is concerned only with the 3rd industry,of which we assume the major trade-gap component in Case I and the major
resource-gap component in Case II. The lst and 2nd industries have theircharacters to keep the major resource-gap components, while the 4th inqustry
has its character to maintain the major trade-gap component.

. Based on these commodity balance sheets, both the resource-gap components

tt
and the trade-gap components of respective industries
are calculated, as' shown''
Table 2

Resource-Gap and Trade-Gap Components

Industry I-S M-E(Case I)1 -2 <O
2
O<1
3
7>6
4
11
>8
E

16

>

15

37

HIKOJI KATANO

38(Case II)

1
2
3
4

-2
o
4
11

Z 13 < 14

<
<
<
>

o
1

5
8

Here we calculate the resource-•gap components of respective industries in thefollowing way :I,-S,=D,-X,.
Sectoral adjustors are selected according to the major gap component ofeach industry. This is, in principle, 'the same method to select the macro-economic adjustor in the conventional two-gap theory. Thus we have the values
required for adjustment both in sectoral level and in macro-economic level, as

shown by Table 3.

Table 3
Sectoral and Macro-economic Adjustments(Case I)

Industry S M
1 -2
2 -1
z

3
4 +1
+3 -3

Net Adjustment
in Macro-economic Level(Case II)

1
2
3
4
Net Adjustment

+4
+1

-2
-1
-1

+3

Z -4 +3

in Macro-economic Level -1
14. These numerical examples illustrate the followings:

Adjustors on the macro-economic level are imports to be increased by 1 inCase I with the major resource-gap, and savings to be decreased by 1 (or domestic

use to be increased by 1) in Case II with the major trade•-gap.

However, considering sectoral adjustors, we can find that the solution ofadjustment problem on macro-economic level is not suMcient. Solution of'sectoral adjustment problem in Case I is as follows:(1) to increase domestic use of commodity 1 by 2,(2) to increase domestic use of commodity 2 by 1,(3) to increase imports of commodity 3 by 1, and(4) to increase imports of commodity 4 by 3.

GENERALIZATION OF TWO-GAP THEORY
Over-productions in the 1-st and the 2-nd industries and under-productions in
the 3-rd and the 4-th industries are the inhibited situations hebind these sectoralad.iustments. The adjustments require to increase imports by 4 and to decreasesavings by 3 (to increase domestic use by 3) in the whole economy. The solutionof adjustment problem on the macro-economic level (to increase imports by 1)
is to consider only the net balance of sectoral adjustments (4-3=1).

Similar findings come from Case II. Solution of sectoral adjustment
problem in Case II is as follows:(1) to increase domestic use of commodity 1 by 2,(2) to increase domestic use of commodity 2 by 1,(3) to increase domestic use of commodity 3 by 1, and(4) to increase imports of commodity 4 by 3.
These are based on over-productions in the 1-st, 2-nd and 3-rd industries andunder-production in the 4-th industry. The total adjustment as a whole of theeconomy is to increase imports by 3 and to decrease savings by 4 (to increase

domestic use by 4). Thus, the solutions of adjustment problem on the macroeconomic level (to decrease savings by 1 and to increase dornestic use by 1) is toconsider only the net balance of sectoral adjustments (-4+3==-1).
15. As mentioned above, the adjustment criterion on the macro-economic levelhas a crucial diMculty, in calculating the net capital infiow requirement fromabroad, to consider only the net balance of sectoral adjustments. This causes

an under-estimation of the net capital infiow requirement for the developing

country. Our numerical examples show the under-estimations as in Table 4.

Table 4
Net Capital Inflow Requirements

Industry Part due to Part due to(Case l) Under-production Over-production

37

1O
21

4 11
z

18

+

1=19>16(Case II)

1
2
3

4

o
1

5
11

Z 11 + 6=17>14
For Case I, the conventional two-gap theory, developed on the macroeconomic level, estimates 16 of the net capital inflow requirement that is equal to

the resource-gap as a whole of the economy. While, the sectoral consideration

39

40

HIKOJI KATANO

suggests 19 of the net capital inflow requirement, in which 1 in the 1-st industry

and 1 in the 2-nd industry are needed for increasing domestic uses of commodities 1 and 2 and 7 in the 3-rd industry and 11 in the 4-th industry are required forincreasing imports of commodities 3 and 4. This shows that the estimated value
16 in the conventional two-gap theory falls short of the actual net capital inflow

requirement. For Case II, sectoral consideration suggests 17 of the net capital
inflow requirement. And this value is larger than the estimated value 14 in theconventional two-gap theory.
Thus we consider that the sectoral consideration is inevitably needed for
estimating the net capital inflow requirement.

V. Exports Expansion through Aid
16. So far, we have assumed that no more export expansion can be expected
than the traditional export expansion can be. Then the excess supply of commodity, if any, has been assumed to be absorbed by increase in domestic use
through decrease in domestic savings. In this situation, the adjustment is con-sidered to be supported by the net capital inflow from abroad. Consideringthat the export expanding industry of the developing country shall be, in manycases, consumer goods industry, this sort of adjustment can increase consumption
level of the country, and increase welfare level of the economy. It is clearly

desirable to decrease stimulus to save, to increase consumption level and toincrease welfare level. However, it may be true only when the developing
country can manage the net capital inflow by itselÅí At the-present situation,
almost all the developing countries are usuaily introducing t.he net capital inflow

for their economic development through economic aid from the developed
countries. Even if the increase in welfare level is supported by this sort of econo-

mic aid, it is rather desirable to increase the welfare level by any means, and theincrease in welfare can not be denied. But, cofisidering a general understandingthat the developing country should do his best for economic development, it is
not always desirable to use the net capital inflow (the aid from the developed
country) for directly increasing the welfare level. The aid from the developed

country should be used for expanding productive capacity of the developing

country, except an emergency. And the increase in welfare level should beconsidered through the productive capacity expanded by help of the economic
aid from the developed country. According to this sort of consideration, it may
be not desirable to decrease domestic savings and to increase consumption level

and welfare level in the export expanding industry with the major trade-gap

component.

GENERALIZATION OF TWO-GAP THEORY
So far, we have assumed that no more exports can be expected than
the traditional exports can be. Then we have considered the excess-supply ofcommodities should be absorbed by increase in domestic use through decreasein domestic savings. However, if the developed countries could inciease theirimports of the commodities from the deve!oping countries in place of the economicaid (the net capital inflow from the developed countries to the developing coun-tries), the excess-supply of the commodities might be absorbed by the expanded

market of the developed countries. In this case, it becomes not necessary toincrease domestic use of the commodities through decrease in domestic savingsin the developing countries. Moreover, if this sort of measure is realized, anearlier closing of resource-gap comes to be realized, because more domestic
savings can be maintained for a certain rate of growth of investment. However,
we should expect more diMculties in expanding exports, even through the economic aid, not only for the developing countries but also for the developed countries.

Opening of the market of the developed countries for the commodities from thedeveloping countries may be possible through the special preference and theother trade policies for the developing countries, but, for making effective resultsfrom these trade policies for a long time, some adjustments in the industrial
structure of the developed countries become inevitable. This sort of adjustment
generates the other diMculties to be solved.

17. Even though we should expect some diMculties on process, the economic
aid for the developing countries should take the forms of the net capital inflow

and the opening of market for exports from the developing countries. The. should be considered as a part to be
criterion is as follows: the net capital inflow
equal to the resource-gap, and the opening of market should be considered for an

excess-part, if any, of trade-gap over resource-gap. The developed countries
have agreed with the idea that the developing countries should realize a certain

growth rate for taking-off the economies into their self-sustained situations,and that the developed countries should give their economic aid to the developing

countries for the purpose. For this purpose, it is desirable that the developed
countries will give the economic aid in the forms of the net capital inflow for

expanding the productive capacity and of the opening of market for absorbing
the excess-supply of commodities.

VI. Conclusion
18. Arguments developed in this paper make clear the following points:(1) For estimating the net capital inflow requirement for the developing

41

42

HIKOJI KATANO

country, the sectoral considerations are inevitably necessary. When the conven-tional two--gap theory, developed on macro-economic level, is used for thispurpose, the estimated value becomes under-estimated.
(2) Excess-supply of commodity should, if any, be absorbed through export

expansion, even though this expansion is supported by help of the developed
countries as apart of the economic aid. When this is absorbed through increasein domestic use of the commodity, the economic development process of thedeveloping country becomes less effective.

ACCOUNTING MEASUREMENTAND HOMOMORPHISM
Isao ]NTAKANO

The aim of this paper is to apply the "homomorphism" concept in measurement theory to business accounting and thereby to provide a formal requirement

for accurate accounting measurement.

I. Measurement, Isomorphism and Homomorphism"The basis of accounting is measurement."(i) Measurement, it is said, isa process of mapping empirical characteristics or relationships into a formal
model by assignment of numbers to objects and events according to any rule.(2)That is, "the purpose of measurement is to represent a given relation (or given
relations) among objects by the predetermined relation (or relations) among thenumbers."(3)Ex. Assignment of a unique number is made to each student for identification (nominal scale). The chronological order of any two persons' years ofbirth can be determined by comparison of their ages (ordinal scale). The temperature of any object is expressed as a ratio of the difference between the object's

warmth and that of the freezing water to the difference between the warmth ofboiling water and that of freezing water in case of Celsius expression (interval

scale). The number of books in a library is counted as a ratio of the number
assigned to the last book counted to unit number 1 (ratio scale).(`)

The measurement theory tells us that whichever kind of number assignmentis going to be made one important requirement for a successful representationof the relation among objects (principal) by a relation among the assigned numbers(surrogate) is "isomorphism" or "homomorphism" between both relations.
The term "isomorphism" may be roughly described as follows. Suppose that
(1) R. K. Jaedicke, Y. Ijiri and O. Nielsen (eds.), Research in Accounting Measurement,(Introductory Comment), American Accounting Association 1966, p. IX.

(2) S. S. Stevens, "Measurement, Psychophysics and Utility," in: C. W. Churchman and
P. Ratoosh (eds.), Measurement, Definition and Theories, New York, 1959, p. 20.

(3) Y. Ijiri, The Foundation of Accounting Measurement, A Mathematical, Economic and
Behaviorat Inguiry, Engleviood Cliffs, N. J. 1967, p. 22.

(4) Cf. Richard Mattessich, "Accounting and Analytical Methods," Richard D. Irwin, Inc.
(Homewood, Ill.) 1964, Chapter 3, Modern Measurement Theory andAccounting. Norton
M. Bedford, lncome Determination Theory: An Accounting Framework, Addison-Wesley(Reading, Massachusetts) 1965, especially pp. 52-57.

"

ISAO NAKANO

a relation R has been defined among any two elements of a set A of measurement
objects and that the relation is the principal to be represented by the measure-ment. Next we stipulate a set of those numbers (B) which are to be assigned
to each measurement object (i.e. to each element of the set A), and we also definea relation S between two numbers of B. Then, a necessary condition for a proper

measurement is that when the relation S is found between two measurement
figures there must always exist the relation R (and not any other) between thecorresponding measurement objects, because only in this case one can be sureof the existence of the principal relationship R on the basis of the surrogate

relationship S. This condition is called "isomorphism."(5) (See Figure 1).
A more strict definition of isomorphism is developed in Appendix A of this paper.

fAB.a -hhsNnl.
-t-i"
R`c.'. ;;.S--xn2f -'/"-'b

Iiti1l1+
1lpI
lt
Figure 1

Ex. For identification of students different numbers n. and nb should
be assigned to students a and b respectively if and only if a and b are different

students (nominal scale). The proper representation of an ordinal relation
requires that, for example, if and only if a person A was born earlier thananother person B the number assigned to A should be smaller (or larger) thanthat given to B (ordinal scale). In case of measuring temperature, the four
numbers n., nb, n., and nd as expressions of the temperatures of four objects
a, b, c, and d must have the relationship n. rvnb>n. rv nd, if and only if thedifference of the warmth between a and b is greater than that between c andd (interval scale). Finally, if and only if the stack of books numbers x times

as many as one book, the number x times as large as that given to one book,that is, x should be assigned to the stack (ratio scale).

The isomorphism concept restricts number assignment in such a way thatany one number is allowed to correspond to one object only. But in real account-ing (and other) measurements it is possible and proper to assign a number toplural objects in the same situation. Hence we must rather adopt a modified
concept, "homomorphism," which still requires the proper representation of(5) P. Suppes and J. L. Zinnes, "Basic Measurement Theory," included in: R. D. Luce,R. R. Bush, E. Galanter (eds.), Handbook of Mathematicql Psychology, Vol. 1, New Yorkand London 1963, p. 6.

45
ACCOUNTING MEASUREMENT AND HOMOMORPHISM

a principal relation R by a surrogate relation S but allows any one number tobe assigned to plural objects.

H. Four Kinds of Homomorphism between Ideal Surrogate-Income
and Real Surrogate-lncome
In considering accounting income measurement, one must clearly distinguishbetween the "income as a numerical expression," that is, "surrogate-income"(ex. the income of \200) and the "income as a substantive object of accounting

measurement," which we describe as "principal-income"{6) (ex. a net increase
in total service potential of an enterprise in a time period).

But this principal-income cannot be compared with the surrogate-income
directly, because the former is something not yet represented by numbers.
(Ex. Consider a stack of books not yet counted as the principal of a measurement.

When one gets areport that they number 52 one cannot check the correctnessof this surrogate measure by means of any direct comparison of those books andthat measure.) A comparison must rather be made between a given surrogate

measure and another surrogate measure that one knows or acknowledges inadvance to be true. So, we are led to introduce a concept, "ideal surrogateincome" as a true 'and proper numerical representation of the principal-income,whereas the term "real surrogate-income" may be given to that surrogate-income
which has resulted from an actual accounting measurement under the conventional
and technical restrictions of current accounting practice. In actual situations

it would be impossible for a real surrogate-income to be equal to the ideal
surrogate income' except as a mere coincidence.
principal-income<tRdeeaallsSuUrrrroOgga2tee-I.kncCoOmMee(;CeOa7CeexPitsUteanlcCeO)nStrUCt)

Our problem is this: what specific relation must exist between the amountof an ideal surrogate-income and the amount of the corresponding real surrogateincome when one is justified in concluding that the periodic income is correct.

The requirement for a correct income measurement will follow using the homomorphism concept as defined above.
We denote the ideal surrogate-income in period i as Pi and the correspond-

ing real surrogate-income as P'i. And a set of the ideal surrogate-income
figures from period 1 through period n shall be P and a set of the real surrogate

income figures during the same time-periods P'. That is,(6) This distinction was explicitly made by Ijiri. Cf. Yuji Ijiri, "Physical Measures andMulti-Dimensional Accounting," in: Research in Accounting Measurement, gP. cit•,p. 154.

46 ISAO NAKANO
P=={Pi, P2, ••• Pn} (1)P'= {P'i, P'2 ••• P'n}• (2)The homomorphism concept requires that in order for an income measurement to be proper, "a certain relation" among the elements Pis in the set of theideal surrogate-incomes P be homomorphically represented by "some relation"

among the elements P'is in the set of the real surrogate-incomes P'. Then,
what is the relation to be represented in this way? There seem to be four alter•.
natlves.

(a) Homomorphism on difference (the same-or-not relation)

This kind of homomorphism requires that the existence of a difference
among the ideal surrogate-incomes of different periods, if any, be faithfully

represented by some relation among the real surrogate-incomes. So, assumingthat P.==450, P.-i==230, what is necessary is merely to show the fact thatP. and P.-i are different, so that any pair of the following measurements

P'n=450, P'n.i=230
Or P'n=300,P'n-i=200

or P'i50, P'.-i=70
will serve the purpose. The only requirement is that the values of the realsurrogate incomes P'. and P'.mi be different from each other.

This kind of information, however, will scarcely satisfy the informationneeds of the interested groups of a firm. They will further seek such information

as the direction and the degree of change in the periodic income. Hence, itwill be utterly unrealistic to try to restrict the "relation" to be homomorphically

represented by income measurement to this "difference" (the-same-or-not
relation).

(b) Homomorphism on ordinal relation
If the "prdinal relation" (in the sense of the greater-or-less relation among

things) is the only relation to be pictured on a relation among real surrogate
incomes, the fact, say, that the ideal surrogate income for this period P. is greaterthan that for some previous period P. (m<n) should follow the fact that thereal surrogate income for this period P'. is greater than that for the former
period P'.. (Or conversely, the measurement rule may as well be such that therelative increase in the ideal surrogate incomes be represented by the relative
decrease in the real surrogate incomes and vice versa). But the important thing
to note is that the increased or decreased amount (difference) in the real surrogate

income need not be equal to the difference on the part of the ideal surrogate
incomes, since the greater-or-less relation is all that is to be expressed. Therefore,

when
Pn=100>Pnz=90,

ACCOUNTING MEASUREMENT AND HOMOMORPHISM 47
then the following alternatives will be permitted:

P'.=100>P'.=90
or P'.==50>P'.=49
or P'.=2>P'.==1•
But it is clear that this sort of income measurement is also too barren for

actual accounting. The important information to be provided seems to include
the knowledge not only 6n the increase or decrease as such but also on the extent

of these changes. '(c) Homomorphism on the interval relation
As an illustration, the homomorphic representation of the "interval relation"

in income measurement denotes the following thing.

Ex. When a sequence of ideal surrogate incomes is
Pn ==100, Pn-i=90, Pn.2"=80, Pn-3=60, that iS,

Pn-Pn-i(==10)<Pn-2-Pn-3(=20),
this kind of homomorphism requires such a sequence of real surrogate incomesas

P'n=80, P'n-i==70, P'n"2=:60, P'n-3=40 (1)Or P'n=5, P'n-1== 4, P'n-2==3, P'n-3==1 . (2)•By such number assignments it is possible to secure the relations

P'n-P'n-1<P'n.2-P'n-3 andP'n-P'n-i Pn-Pn-i 1
P'n-2-P'n-3 Pn-2'Pn-3 2,
so that the interval relation (as a quantitative relation among any two pairs) among

ideal surrogate incomes is homomorphically represented by some relation among
real surrogate incomes.

Certainly, more information will be provided by this measurement than by
the measurements only capable of the homomorphic expression of difference(that is, the•-samg-or-not relation) or the ordinal relation. But the measurementin this category still fails to correctly represent the variation rate of incomes ofany two periods. In the above example, the variation rate of the current period's

ideal surrogate income to that of the period n-3 is

P='6o
100=1'66.6 (166.6o/.).
Pn:3
But on the basis of the sequence of real surrogate incomes (1) above,pe.'-", = i =5.ooo (sooo/,)\1.666.
This illustration will show the insuthciency of the income measurement which
is only capable of the homomorphic representation of the interval relation above.

(d) Homomorphism on "ratio relation"ISAO NAKANO

48

We define the ratio relation as the ratio of income figures of two different

periods. So, an income measurement capable of homomorphically representing
the ratio relation means such an income measurement that will measure the realsurrogate income for each period such that the ratio of ideal surrogate incomes

will equal the ratio of corresponding real surrogate incomes. For example,
when P.=:100, P.-i=:90, then the pair P'.==100, P'.-i=90 or P'.==10, P'.-i==9 or P'.==20, P'.-i=18 will allow the homomorphic representation of theratio of P. and P.-i, because

Pn P'n 10
Pn-i P'n-i 9'
There will scarcely be any room for doubt that an income measurement
suMcing the requirement of this "homomorphism on ratio relation" is superior
to any other measurement coming up to the standard of any one of the otherthree homomorphisms. The reasons are twofold: (1) that measurement can
produce an accurate report on the variation rate of ideal surrogate incomes ofa pair of periods, and (2) a homomorphic measurement of the ratio relation
simultaneously provides information about the interval, ordinal, and nominal(the-same-or-not) relations. In reality, the coverage of the content of information

provided by each of the four kinds of measurement can be denoted as fonows.
etvs"seOe"t oOÅíf iinatteitOvi!eiet?oo

ge s"seoe"t.gO;" "seS9`tfe"tenO

itdibe!l%eoo.8 Ke<`

E

cr/: oeg'Uf.3,n

pte
'o'

=

Figure 2
A proof on this point is given in Appendix B of this paper. We will show
a numerical example demonstrating the proposition (2) above.

Let ideal surrogate incomes of four periods be P.=100, P.-i=90, Pn.2==80, and P.-3=60. We assume a sequence of real surrogate incomes representative of the ratio relations of those income series homomorphically as P'.==10,

P'n-i==9, P'n-2==8, and P'.-3=6. An "interval" relation as to that ideal
income sequence will be

Pn'Pn-i(=10)<Pn-2'Pn-3(=20),

ACCOUNTING MEASUREMENT AND HOMOMORPHISM 49
whereas the interval relation among the corresponding real surrogate incomesalso isP'nmP'n-1(=1)<P'n-2-P'n-3( =2)•
Therefore, the interval relation is homomorphically expressed by thismeasurement (viz. by a measurement capable of homomorphically representing
the ratio relation).

Further, the ordinal relation of those ideal incomes, say P.=100>P'.-i==90, is homomorphically represented by the ordinal relation of the corresponding

real surrogate incomes P'.(==10)>P'.mi(=-9)•
Finally, it would be almost needless to point out that the relation that theideal income figures of the four periods are different (the-same-or-not relation)

is homomorphically expressed by the different figures of the corresponding real.
surrogatelncomes.

III. Homomorphism of interperiod-Ratio and Homomorphism of UnitRaito'

So far, the homomorphism on ratio scale has been defined as a homomorphic
representation of ratios of ideal surrogate incomes of different periods by theratios of corresponding real surrogate incomes, which we call "homomorphism
of interperiod-ratio(s)" (of incomes). Then, it follows that when a series ofideal surrogate incomes are' Pn-3=60,
Pn=100, Pn.i=90, Pn-2 =80,
the corresponding real surrogate incomes could be

P'n=100, P'n-1==90, P'n-2'=80, P'n-3=60,

Or P"n=;'`10, P"n-1=:9, P"n-2=8, P"n-3=6.

Now assume two firms have earned the same amount of ideal surrogate
income in period n, i.e. P.=100. The firm A is measuring income in such a
way as to produce the real surrogate income series (P'n, P'.-i, P'.-2, P'.-3),
so that its accounting income for period n, P'., is 100. 0n the other hand, thefirm B calculates income such that the real surrogate income sequence (P".,P".-i, P".-2, P".-3) will result, so it reports an accounting ingome P".==10
for period n. In other words, the two firms A and B with the same earned ideal

surrogate income turns out to measure and report different amounts of realsurrogate income (100 vs. 10) and therefore show different profitabilities. We

are led to conclude that assurance of the "homomorphism" defined above, viz.
"homomorphism of interperiod-ratio" does not necessarily enable a correctcomparison of income information of different firms.

ISAO NAKANO

50

This is similar to a misleading case where a person calls something "onebook" but another insists that it is ten. So, we will have to recommend against

the exclusive use of the "homomorphism of interperiod-ratio" as a standard for

judging the propriety of accounting income measurement.

Hence we will try to develop a second ratio-homomorphism concept. Let
us conceive a set U consisting of ideal surrogate incomes of the periods 1 throughn, i.e. Pi, P2, ... P., as well as of the numeral 1 (as the unit of the numericalexpression of income).
fl= {1, Pi, P2, ••• Pn}•

Further, another set fl' composed of real surrogate incomes P'i, P'2 ... P'.
and the numeral 1 (as the unit of quantitative expression of these incomes).

fl'={1, P'p P'2, P'3 ••• P'n}'

The second definition of ratio-homomorphism is that the ratio between eachideal surrogate income Pi and the measurement unit 1 in ll, viz. P,/1 (i=1, 2... n) is homomorphically represented by the ratio between each corresponding
real surrogate income P'i and the measurement unit 1 in fl', that is, P',/1.

P. P'.

tv
11•'• P.=pt.

et

In short, this kind of homomorphism requires that t,he amount of each ideal

surrogate income be equal to the amount of the corresponding real surrogate

income. Since this homomorphism concept involves an homomorphic expression of the ratio of each ideal surrogate income to the measuring unit, we can callit "homomorphism of unit--ratio." It will be clear that an income measurement
coming up to the standard of the "homomorphism of interperiod-ratio" does notnecessarily suMce the "homomorphism of unit-ratio," but that a measurement
fu1fi11ing the latter never fails to assure the former requirement.

Conclusion
I have analyzed the homomorphism concept in the context of accounting
measurement, The following five variants of homomorphism have been brought
to light:. 1) homomorphism on difference,2) homomorphism on the ordinal relation,3) homomorphism on the interval relation,4) homomorphism on the interperiod-ratio,5) homomorphism on the unit ratio.

51
ACCOUNTING MEASUREMENT AND HOMOMORPHISM

These are arranged in the order of increasing correctness of the accounting

measurement. Let us assume that the ideal surrogate income concept has been
properly defined in a way which fits the informational needs of the interested

groups to a maximum degree. Then, the increasing correctness of accounting
measurement as compared with this ideal surrogate income will probably correspond to the increasing usefulness of the outputs from this accounting practice.
An interesting research program suggests itself from this reasoning.

That would go as follows.

1) Define the accounting income concept in the most (or in a suMciently)
usefu1 way.

2) Derive a series of the ideal surrogate income numbers consistent withthis concept.

3) Compare this series with the corresponding series of real surrogate
income numbers, and determine, for each level of homomorphism, the extent towhich this homomorphism has been achieved.
4) Apply appropriate techniques of statistical analysis to these results.
It will enable you to determine the degree of usefulness of the prevalent account-ing information.

Appendix A
The Definitions of Isomorphism and Homomorphism
In order for a measurement to be able to properly represent a relation among

objects by a relation among numbers, both relations must have "the same structure." The "isomorphism" concept aims at defining this intuitive idea of "thesame structure" more accurately.
We begin by defining a "relational system." A relational system is a formof a finite order a==<A, Ri, R2 ... R.>, where A denotes a nonempty set ofelements which we call the domain of the relational system and Ri (i=1, 2 ... n)means a relation on A.

Ex. 1. Assume that Ai is aset of all human beings living now, and Ri abinary relation on Ai such that aR,b when and only when as to arbitrary two
persons a and b in Ai a was born earlier than b. Then, ai==<Ai, Ri> is arelational system.

Next, we will define the "type" of a relational system. Let a sequenceof n positive integers be S==<mi, m2...m.>. It is possible that mi==mj.
Then, a==<A, Ri...R.> is called "of type S," when the relation R, denotes a
relation among mi elements.

Ex. 2. The relational system a in the above Example 1 is of type 2,

ISAO NAKANO

52

And, assuming a2=<A2, P2, T2>, where P2 and T2 are respectively binary
relations on A2, a, is said to be of type <2, 2>.
As another preparatory definition, two relational systems are called "similar"

when they are of the same type (ex. when both are <2, 3>).
Now we are in a position of giving the general definition of "isomorphism."

Assume that a==<A, Ri...R.> andP==<B, Si...S.> are similar relational
systems. If there exists a one to one functionf from A onto B and if for each i(=1...n) and for each order of the elements of A <ai, a2 a.>, there exists Ri(a,...a.) when and on!y when there is S, (f(a,)...f(a.)), then 13 is called an"isomorphic image" of a. Instead of the term "isomorphic image," it is also
said that a andP are "isomorphic."
When the condition thatfis one to one is dropped, the aboveP is said to bea homomorphic image of a.
(The foregoing is a summary from: Patrick Suppes and Joseph L, Zinnes,
Bast'c Measurement Theory, op, cit., pp. 3-7. Foramore rigorous explanationof isomorphism and homomorphism of relational systems, refer to: Yuji Ijiri,
The Foundations of Accounting Measurement, A Mathematical, Economic, andBehavioral Jnquiry, op. cit., pp. 167-183,)

Appendix B
The Relation of the Four Kinds of Measurements(a) The proof that a homomorphic measurement of a ratio-relation iscapable of homomorphic measurement of interval relation, ordinal relation anddifference (the same-or-not) relation at the same time.

We denote any two elements (components) of the given principal as a and b,

and assume that by the measurement (capable of homomorphic representationof a ratio-relation) the numbersf(a) andf(b) are assigned to a and b respectively.

We use the symbols a and b also for denoting the ideal surrogate measure of theelements of the principal a and b.

Since this measurement can represent the ratio relation on the principal

homomorphically,Z-)f[Sj -k -,i,(b \O, f(b) \O).
Let any four elements of the principal be a, b,cand d. Then, the image of theintertial''
relationof the principai #--db' is i((f)).-i(S)) , where at least either one

off(c) andf(d) is not equal to zero. Assuming f(c) to be non-zero,

ACCOUNTING
MEASUREMENTANDHOMOMORPHISM 53
f(a) f(b) a b

f(a)-f(b) f(c) f(c) c c
f(c) -f(d) IN f(d) 1-.!tf(c) c('•' this measurement can represent the ratio relation homomorphically)

a-b=c-d. K2)

The (2) above shows that a homomorphic measurement of ratio relation canalso represent an interval relation homomorphically.

Secondly, taking arbitrarily two elements a and b of the principal P, where
neither b norf(b) is zero,f(a)-f(b)=-f(b)(i((Zl-i]-f(b)({]--i)-=f(,b)(a-b). -(3)'When f(bb) >O, the ordinal relation (greater-or-1ess
relation) between aand b is evidently represented by the ordinal relation between f(a) and f(b) ('•'

Ifa>bthenf(a)>f(b). Ifa<b,f(a)<f(b)). N'ext, let f(bb) <O. Then, if a>b, then f(a)-f(b)<O, that is, f(a)<f(b). If a<b, then f(a)>f(b). Therefore,
in this case we can infer the ordinal relation of the principal from the ordinal
relation of the measuies properly, if we set the rule that the ordinal'

relation of

the measures is the opposite of that of the components of the principal.
Finally, as to any two elements a and b of the principal P, from (1)a f(a)-k,b --- f(b)so thAt f(a)iF1 if and only if a#b. Accordingly, the difference (the same-or-f(b)not) relation of the components of the principal can be judged on the basis ofwhether the ratio between the corresponding measures is one.

(Q. E. D.)(b) The proof that a homomorphic measurement of the interval relation can
properly represent the ordinal and difference (the-same-or-not) relations but notnecessarily measure the ratio-relation homomorphically.

Since the given measurement g can homomorphically represent the interval
relation of the elements, a, b, c and d of the principal,

a-b g(a)-g(b)c-d== g(c)-g(dy . -(4)From (4)

54 ISAO NAKANO
g(a)-g(b)-= g(Cl!gd(di (a-b). ,. ---(s)From (s), if g(Cl--gd(d) >O, then g(a)>g(b) when and only when a>b

and g(a)<g(b) when and only when a<b. Hence, this measurement (g) can
measure the ordinal relation (the greater-or-less relation) of the principal homo-morphically, conversely, if g(Cligd(d) <o, then g(a)<g(b) when a>b andg(a)>g(b) when a<b. Therefore, in this case one can infer the ordinal relationof the principal from that of the measures on the knowledge that the ordinal
relation of the measures is the opposite of that on the principal.

Next, in (s), g(CIIgd(d) \o (•.• if g(2Egd(d) -o, then g("2igb(b) --o,which means that though a-b\O, g(a)-g(b)=O. This, however, contradicts(4) ), so that g(a)=g(b) when and only when a=b, and g(a) \g(b) when and only

when a iFb. Therefore, this measurement (g) measures the difference relation

homomorphically.
In order to prove that a homomorphic measurement of the interval relation(g) does not necessarily represent the ratio relation homomorphically, it will be

suMcient to give a single example, which was already provided on page 47 of thispaper.

(Q. E. D.)(c) The proof that a homomorphic measurement of the ordinal relation
can represent the difference relation properly but cannot necessarily measure theinterval (hence also the ratio) relation homomorphically.

If a measurement cannot accurately represent the difference relation on theprincipal, it means that either (a) the fact that a#b is expressed as a=b, or (b) thesituation that a ==b is expressed as a \b. And both of these measurements clearly

represent the ordinal relation between a and b incorrectly. Therefore, a homomorphic measurement of the ordinal relation never fails to measure the difference

relation homomorphically.

In order to prove that a homomorphic measurement of the ordinal relation
cannot necessarily represent the interval relation properly, it will be suMcient

to show a single example, which, however, was already given on pp. 46UF7 ofthis paper.

(d) The proof that a homomorphic measurement of the difference relation
cannot necessarily refiect the ordinal relation (hence also the interval or ratio

relation) homomorphically.

The showing of a single example will be suMcient for this purpose, andsuch an example was already given on pp, 46 of this paper.

AN INTERPRETATION OF TWO STAGE
LEAST SQUARES ESTIMATORS AS
INDIRECT LEAST SQUARESESTIMATORS IN THE
OVERIDENTIFIED CASE*
Hiroshi SADAMiCHi
The applicability of the indirect least squares method is Iimited to thejust-identified equation, in which case there is proved to be an identity between

the two-stage and the indirect least squares estimators. This study is to extend

the indirect ieast squares method to the over-identified case and to derive an
identity between the two-stage and the extended indirect least squares estimators.

I. Introduction
The two stage least squares (2SLS) estimators have been interpreted in termsof the instrumental-variables,(i) the k-class,(2) or the double k-class estimators.<3)

The 2SLS method was originally elaborated by Theil and Basmann independently
in order to cope with the problem of estimating the overidentified equation which

the indirect least squares method could not handle. In this note we present aninterpretation of the 2SLS estimators, which might be of special interest since
it is closely related to that old indirect least squares method in the overidentified
case.

il. The Problem
The model we are considering is linear, with G equations, and contains as
variables yi•••yG, xi•••xK, ui...uG, each of which is a column vector of T com-ponents. Each component of any variable is defined as the observed value
or its equivalent divided<`) by the square root of T.

YB=Zr+U* This is the revision of my original paper which was read at the Kansai conference of theJapanese Association of Theoretical Economics held in June, 1968.
( 1 ) See Klein (1955), Zellner and Theil (1962).

(2) See Theil (19S8)•( 3 ) See Maeshiro (1966), Oi (1969), Dhrymes (1969).

(4) The same treatrnent of variables is done in Basmann (1957). .

HIROSHISADAMICHI

56

where Y=:(y,..,yG), Z==(2,..•xK), U==(u,...uc), B=(P.h), I'==(ri,). The y's
are thejointly dependent variables. The x's are the predetermined and linearly

independent variables and their moment matrix is assumed to be well behavedin the limit.{s)lim Z'Z=li:m E Z'Z==M

T-oo T.co

where both limits exist and M is a nonsingular constant matrix independent ofT, The u's are the random variables, which are mutually independent except
contemporaneously, and each variable is serially independent and homoskedastic

with zero mean.
Eui=o. Euiuj'==IItl{-J'•IT

where IT is the identity matrix of order T and a,,• is a finite constant. The
P's and r's are the constant parameters and some of them are specified a priori

to be zero so that each model-equation may be identified. B is assumed to benonsingular. The reduced form may be written as

Y=Zfl+V
where fl =I'B-i, V==UB-i=(vi...vc). Each reduced-form random variable
is serially independent and homoskedastic with zero mean.

Evi=O, Ew,vi'== ttj .IT'

where wiJ• is a finite constant.

Let us consider the i-th model-equation of the model. It contains H jointly

dependent and J predetermined variables. Rewriting it as an explicit functionof the explained variable and renumbering some variables, we can obtainyi= YiK?i+ Ziri+ui
where Yi=(yi,•••yi.), Zi=(2i,•••xi,), Pi'=(Pi,•••Pi.), ri'=(ri,•••ri,)• Z may be.
Wrlttenasz=(z,, z,*)where Zi* is the matrix of those predetermined variables which appear in themodet but not in the i-th equation. The reduced-form equations corresponding

to H jointly dependent variables are then given by
yi == ZiTil + Zi*7ri2 +vi

Y, =Z,ff,i+Zi"fl,2+V,
where Tii, Ti2, flii and lli2 are the corresponding submatrices of fl and Vi=(wi,•••vi.)• Postmultiplying the second equation by P, and subtracting from the(5) See Christ (1966), pp. 35zF355.

AN INTERPRETATION OF TWO STAGE AS INDIRECT LEAST 57
SQUARES ESTIMATORS IN THE OVERIDENTIFIED CASE

first equation yields
y,- Y"?,= Z,(T,, - ",,P,)+ Z,*(T,,- ll ,,B,)+ (v,- V,P,)•

Comparing with the model-equation we have the identifiability relation-therelation between the model-equation parameters and the reduced-form coeMcients,

T,i=lliiPi+ri
7ri2=lli2i9i
and the relation between the disturbances of the model-equation and the reduced

form,
ui==vi-P'lii9i.
Since the model-equation is identified the rank of (Ti2, lli2) is (H-1) and Pi is

uniquely determined.
Our interest lies in estimating the model-equation parameters Pi and ri.
We can not obtain the desirable estimators of P, and ri by applying the leastsquares method to the model-equation since Yi is correlated with ui. However
the classical least squares estimators of the reduced-form parameters have desirable properties.{6) The idea of the indirect least squares method is to obtain
the desirable estimators of Pi and ri indirectly from the identifiability relation

with the use of the least squares estimators of the reduced-form parameters but

not directly from the model-equation in question.

T,iAA=fliiPi+ri

AA
Ti2=Oi2Pi

AAA A

where Tii, Ti2, flii and fli2 are the least squares estimators. In the just-identified

case where there are as many equations as unknowns the above system can besolved uniquely for Pi and ri.

A AA
i?i=lli,ITi2

AA AAA

ri=7vil-flilUi21Ti2

These are called the indirect least squares estimators. The trouble with thismethod is that in the over-identified case where there are more equations than'AA

unknowns the rank of (Ti2, fli2) is H in general and that no set of values of P, exist

that will satisfy the system.

Let us write the classical least squares estimatois of the reduced form.

A(:.l;)-=(z'z)-iz'y,-(:l)+(z'z)-'z'v,(6) See Mann and Wald (1943), Durbin (1960).

58 HIROSHI SADAMICHIA(l•liil)-=(z'z)-'z'y,-(S:,;)+(,z'z)-iz'v,
Substituting into the identifiability relation we haveAA(:•l,i)-(IZ•[ll)pi+(6')r,+u,•ui =(Z'Z)-iz'u,.
It is no longer exact like the identifiability relation but stochastic. This stochastic

property prevents the existence of the unique solution of Pi in the overidentified

case when we use the indirect least squares method. Since we can not solve itby neglecting the random part, i. e., by the indirect least squares method, we may

estimate it by taking care of the error term. It seems meaningless at first sightto estimate the parameters P, and r, of this stochastic identifiability relation.

However we may regard it as an ordinary stochastic model because it is nothing
but a linear transform of the model-equation through the transformation matrix

given by (Z'Z)-'Z'. We shall call it the derived form of the model-equation•
It will be shown that the derived form satisfies all the assumptions of thegeneralized least squares method asymptotically. The expectation and thecovariance matrix of the error term are asymptoticallylim E V7 u"• -O
lim E (V-7i-u,"• ) (V-T7ui )' =a,, plim (Z'Z)-'

and the explanatory variables are nonstochastic in the limit.
piim' (/t• lll)=:(Zi•l)

Thus, applying the generalized least squares method{7} to this derived form by

aii matrix given by using the estimated covarianceir-(Z'Z)-i we can obtain theestimators of Pi and ri which have such desirable properties asymptotically as
the generalized least squares estimators do.
(R•j)-[(S• I,i 6J)'(z•z)(S. Il 6J)]-i(S. Il 6J)(.•.)(#.ll)

We may call them the (extended) indirect least squares estimators, which become
indenti,cal with the well-known indirect least squares estimators in the just-identified case. As seen below in the over-identified case they are identicalwith the 2SLS estimators.

(7)

We could apply the classical least squares method to the derived form, in which casethe resulting estimators would be less eMcient and have nothing to do with the 2SLS
estlmators.

59
AN INTERPRETATION OF TWO STAGE AS INDIRECT LEASTSQUARES ESTIMATORS IN THE OVERIDEN. TIFIED CASE

A;,;izZ((zZ,'mM:l)(z•n((Z'a-'Z'Y,, (z'z)-iz•z,)]-i[((fi•i)===Å~( zY,`izZ((zZ,'S)):i)(z'z)((Z'Z)-'z'or,)- Yi'Z(Z'Z)-iZ'Yi Yi'Zi Yi'Z(Z'F)-iZ'>y,( zi'Yi
zt'ze)'i( zL
1AA-(Y`'Y27.,.V,Y'Zi

A Vt') ,,Yi, ZI)-i( Ypli/7,
Zi,

K V,== Y,-Z(Z'Z)-iZ'Y,.
where
Thus we have shown thei dentity between the 2SLS and the (extended) indirect
least squares estimators.
identifiability relation has also

The relationship between the 2SLS estimators and the
been clarified.

REFERENCE[ 1 ] Aitken, A. C., "On the Least Squares and Linear Combination of Observations," Proceedings of the Royal Society of Edinburgh, 55' (193-1935), 42-48.
[2] Basmann, R. L., "A Generalized Classical Method of Linear Estimation of CoeMcientsin a Structural Equation," Econometrica, 25 (January 1957), 77-83.
[ 3 ] Christ, C. F., Econometric Models and Method, New York: John Wiley & Sons, Inc., 1966.

[4] Dhrymes, P. J., "An Identity Between Double k-Class and Two Stage Least Squares
Estimators," International Economic Review, 10 (February 1969), 114-117.
[5] Durbin, J., "Estimation of Parameters in Time-series Regression Models," .Journal of
the Royal Statistical Society, B. 22 ( January 1960), 139-153.
[ 6 ] Klein, L. R., "On the Interpretation of Theil's Method of Estimation of Economic Relations,'' Metroeconomica, 7 (Decernber 1955), 147-153.

[7] Maeshiro, A., "A Simple Mathematical Identity Among k-Class Estimators,'' Journal of
the American Statistical Association, 61 ( June 1966), 368-374.
[ 8 ] Mann, H. B. and Wald, A., "On the Statistical Treatment of Linear Stochastic Difference

Equations,'' Econometrica, 11 (July-October 1943), 173-200.
[ 9 ] Oi, W. Y., "On the Relationship among Different Members of the k-Class," International

Economic Review, 10 (February 1969), 36-46.
[10] Sadamichi, H., "A Synthesis of Simultaneous Equations Estimators with an Application
to an Inventory Model," Ph, D. Dissertation, Department of Political Economy, The

Johns Hopkins University, 1970.
[11] Theil, H., Economic Forecasts and Policy, Amsterdam: North-Holland Publishing Co.,1958.
[12] Zellner, A. and Theil, H., "Three Stage Least Squares: Simultaneous Estimation of
Simultaneous Equations," Econometrica, 30 ( January 1962), 54-78.

A NOTEON THE ONE-DIMENSIONALRANDOM SEARCH
Komayuki ITow
Recently a number of search methods, called the branch-and-bound methods
have been developed: integer programming, nonlinear programming, the travel
salesman problem, the quadratic assignment problem, nonmathematical programming applications (see reference [3] for survey of these applications). Various

papers exploring some basic characteristics of branch-and-bound methods havebeen published. Among these, the general formulations of L. G. Mitten is aninteresting work. The purpose of our note is to state the one-dimensionalrandom search according to the general formulation by Mitten.

I. The Formulation of L. G. Mitten
Basic element: Let S be an arbitrary set, let f:S->R be a real valued
function and let

suPXES f(X)=f*.
The problem is to find the set of optimal feasible solutions S*, whereS*= {x*1x"ES and f(sc*)==f*}.
It is assumed that T is a super set of S(ScT) with extension g off,g;T-->R,
that is,g(x) ===f(x) for all xES

and that T=2T and Z=2T.
For notational convenience, U(t) will denote{xlxEuTi, TiEt and tEZ}.
The computational procedure requires that there exists a collection to where(a) U(t,) c T- S,(b) all singleton nonfeasible subsets are included in to, that is, if xE

T-S, then {x}Gto (see reference [2] foi the meaning of thesebasic elements).

II. Branching
The branching rule is a function P : Z.Z with the following properties:

62 KOMAYUKI ITOW(a) U(P(t))==U(t); '(b) T,'EP(t) on]y if Ti'cT,Et;(c) P(t)#t if and only if t contains a subset Ti consisting of more than

one element.

HI. Bounding(1) The upper bounding rule is a function B.' T->R with the following.
propertles:(a) g(x)SB(T,) for all xE T,cT,'(b) B( T, ') ;sl B( T,) if T,'c T, c T;(c) B({x})=-g(x).

• (2) The lower bounding rule isafunction b: Z->R with the following
properties for any collection t:(a) b(t) S. f* ;(b) b(P(t))lb(t);(c) b(t))f(x) if ecES and {ac}Et;(d) b(t')=b(t) if t'ct afid for every T,Et-t', either T,Et, or B(T,)<b(t). •IV. Branch-and-Bound'The branch-and-bound recursive operation is a function B: Z->Z with theproperty that, jf . , .
B(tt) ==t,thenB(t')=t-twheretm-(tat,)u{Ti i T,Et and B(T,)<b(t)].
The operation B yields a sequence {t"}.>o defined t"'i==B(t") for n>O if applied
to any collection t'.

V. One-dimensional Random Search
Suppose we are confronted with an optimization problem of the form:

maximize f(x) subject to .
f: an unknown concave unimodal function,

f: S.R,
S: {xlxER and a<sc<b},

A NOTE ON THE ONE•-DIMENSIONAL RANDOM SEARCH 63

R: the set of real numbers, .. .
The functionf(sc) is unknown. However, any particular value off(x) canbe evaluated. A concave unimodal function f(x) has the following property.
There exists a riumber x,, a<x,<b such that f(xi)<f(x2) for (Xi, x2)E{(Xi, X2)
lxi<x2s; rco and xi, x2, xoES} and f(xi)<f(x2) for (ooi, x2)E{(xi, x2)lxi>x2>- xo

and xi, x2, xoES}. ' '' ' 'Now, we are going to introduce the basic structure of our random search(see reference [4] for details).

Assume that f(x,) and f(x,) are computed respectively where both x,(ES)and x2(ES) are random variables with a uniform distribution over S. Letxi<x2 be assumed. Then, since the functionf is unimodal, one of the following
cases holds exclusively;case(a) f(x,)<f(x,) for sc,, x,ES,case(b) f(x,)>f(x,) for x,, x2ES•(We disregard the unit probability event that f(xi) \f(x2)•)

For reasons of symmetry we take f(x,)>f(x,) vvithout generality. Iff(xi)>f(x,), the interval to search is reduced to (a, x,) for the unimodalityof f'A third additional random variable sc, with a uniform distribution (a, sc,)is chosen. Note thatfhas been computed at the point xi within the interval(as x2) and that xi is a point with a uniform probability density on the interval(a, x2). Thus, xi and a", are random variables with the uniform distribution
over (a, x,). The interval to search is determined by the same procedure as
described above.
Let yi, or2 be defined as follows;

yl =min {xl, x3}y2=max {xl, x3}
Iff(Yi)<f(Y2),
the interval to search is reduced to (yi, x2), while, if

f(Yi)>f(Y2), 'the interval to search is (a, y,). Thus the computed point within the interval
to search has a uniform probability density on the interval to search. Therefore,

the procedure which corresponds to the n-th search is the same as in the above
procedure.

VI. Branch-and-Bound Property of One-dimensional Random Search
The branch-and-bound principle willttbe applied to the above one-dimen-

ITOW
KOMAYUKI

64

sional random search.

We choose'T-- {xixER and a.<xsb}
as the superset of S with extension g of f,. g: T->R. '' 'The branching ruleP:.13(t)=={T,, T,, T,}
where (let xi, x2 be random variables with a uniform distribution

over (c, d).)t={(c, xi), (xp d)lc<xi<d and c, xi, dES},
yl=min {xl, x2},y2=max {xl, x2},
c, yl, pt2, dES,
T, == (c, y,),T,=(y,, y,),T, =(1•,, d)The upper bounding rule B:
g(x)SB(T,) -=g(o,,) for xE T" if g(yi)<g(Y2),g(oc)SB(T,) ==g(y,) for xET3, if g(yi)>g(pt2)•
The lower bounding rule b:b[P(t)]==max{g(y,), .a(y,)}•VII.

Branehiand-BoundThe branch-and-bound recursive operation B:
B(t)-=.P(t)-t-•

where
TiEt- if B(T,)<b<P(t)) orT,et- if B(T,)<b(P(t)).
For some collection ti, the branch-and-bound recursive operation generates
the sequence {t"}.>o with t"+i==B(t") for n>o. The sequence {tn}.>o converges
to t"=:x, with unit probability in the limit.

REFERENCE[1] E. Balas, "A Note on the Branch-and-Bound Principle," O. R• 16, 1968•[2] L G• Mitten, "Branch-and-Bound Methods: General Forrnulation and Properties,"
O. R. 18, 1970.
[3] E• L• Lawler and D. E. Vt'ood, "Branch-and-Bound: A Survey," O• R• 14, 1966•[4] K• Itow, "One-dimensional Search by Random Procedures," Business Machine SeriesNo• 13, The Research Institute 'for Economics and Business Administration, Kobe

University, 1972.

DISTRIBUTIONRATESYSTEMS AND
EXCHANGEOFSEIGNIORAGE

Kazuhiro IGAwA
introduction
Many economists are seeking for an international monetary system in whichinternational trade and payments can operate smoothly. Though the adjustablepeg system has been used, many economists are thinking that the flexible exchange

rate system is preferable. Comparing the exchange rate systems, we analyze
them in this paper, from the view point of distribution of seigniorage among.
countrles.
For this pupose, we must make clear not only the static properties but also

the dynamic properties.of the exchange rate systems, because the long-run
aspects are important. And we clarify how seigniorage is distributed under
fixed or flexible exchange rate systems, among countries.
In section I, we build a growth model for the fixed exchange rate system,
then examine its static feature in section II, and we show its dynamic feature
in section III. In section IV, the properties of the flexible exchange rate system

are discussed, and in section V we make a comparative analysis of the exchange
rate systems.

'
I.

We make a simple model in which the essential parts of the problems are
retained.

We begin with the case of the fixed exchange rate system. The following

presumptions are made. We take a world composed of two countries, a key
currency country and a non-key currency country. Although there are in fact
two kinds of currencies, it seems by choosing the currency unit which makes
the exchange rate unity that only one currency is used. There is only one sortof goods, which can be used as well for consumption as for investment, for export

as well as import. Perfect competition prevails and by the interactions of the
behaviour of economic units (governments and private sectors), the equilibriumsof the whole markets are reached.
It is convenient to list the notations used here. Note that "per-capita"

KAZUHIRO IGAWA

66

implies normalization with the amount of labour in the world and "real" implies
representation in terms of goods.

k.: per-capita quantity of capital stock in country A
kb: per-capita quantity of capital stock in country B
m.: per-capita amount of currency in country A
mb: per-capita amount of currency in country B
l.: per-nycapita amount of demand for currency in real terms in countryA
lb: per-capita amount of demand for currency in real terms in countryBor.: per-capita level of national income produced in country A
yb: per-capita level of national income produced in country B
b: per-nycapita balance of payments in real terms of country B
p: price level of money (inverse of general price level)e.: per-capita quantity of government expenditure in country A
eb: per-capita quantity of government expenditure in country Bt.: per-capita tax in country A
tb: per-capita tax in countiy B
e: rate of increase of the amount of key currency
r.: marginal productivity of capital goods in country A
rb: marginal productivity of capital goods in country B
T.: expected rate of increase of P
n: rate of growth of labours.: marginal or average propensity to save in country A

sb: marginal or average propensity to save in country B

For the government sector, we assume the following behaviour. In the
key currency country (country A), the government expenditure is met by taxationand creation of new currency. In the other country (country B), a balanced
budget is adopted. Further we assume that the government expenditure ineach country is directed to consumption goods only. The newly issued amountof currency in country A is equal 'to the budget deficit and some part of it flows

out to country B, corresponding to the balance of payments deficit of country A,

then the amount of domestically circulating currency increases in country B.
Therefore, three kinds of policy instruments are available, money creation incountry A and taxations in both countries.

We formulate the policies of the government sectors as follows. For country A:(e.-- ta)/P== e(Ma+Mb) (1)EXCHANGE RATE SYSTEMS AND DISTRIBUTION OF SEIGNIORAGE 67
that is, the government deficit of country A is equal to the amount of increase

in total currency of the world. AndforcountryB:

eb === tb (2)Both capital and labour are used to produce goods, but there are no inter-national movements of production factors. We assume that they have the same
quality in both countries and the amount of labour is growing at the same rate n.

Production functions have the usual neoclassical well-behaved properties such as

homogeneity of degree one, decreasing marginal productivity etc., and also are
identical in both countries. So, the level of per-capita national income produced
and the marginal productivities y., r. andyb, rb are determined by capital-labour
ratios k. and kb, respectively.

We specify the demand pattern of each private sector as follows. The
demand for goods is determined by disposable income; for simplicity it isassumed to be a certain proportion of the disposable income. The demand forfinancial assets is determined by the income produced and the rate of returns for
assets. Generally, the total value of assets is also an element which affects theamount of demand for assets, but we may neglect it, assuming that there is nomarket for capital goods. The demand for investment goods is the difference
between the savings and the amount of the increased demand for financial assets.

Supposing that the amount of demand for currencies in real terms l. andlb are determined respectively by y., r., Te and yb, rb, 7re, the market equilibriumof currency can be formulated as:

P(1+e)(m.+mb)=:l.(y., r., Te)+lb(yb, rb, 7re) (3)presuming that there are no markets for capital stock and price changes of themneed not be considered. Though there are two markets, goods and currency,
one of them is not independent by the Walras' Law.
The balance of payments of country B in real term is defined as:

b= l, - Pm, (4)that is, as the monetary approach shows, the excess demand for currency is
fi11ed with the balance ofpayments surplus. Some parts of the increased amountof country A's currency are held by country B:

ea-ta=b+la-PMa (5)When k., kb, m., mb are constant, e is given and 7re is determined exogenous!y,the equation (3) gives the static equilibrium value of P. As the left hand side ofthe equation (3) is an increasing function of P and the right hand side of it is( 1 ) The case where country B also increases the amount of domestic currency, will be referred

to in the later sections.

68 KAZUHIRO IGAWA
independent of P, the equilibrium price level is determined uniquely and thissystem is stable.

ll.
The properties of this static system can be seen by analyzing the equation(3). As its Ieft hand side is constant, the amount of currency and its price level

move inversely, which is a quantity theory of money.

We proceed to the analysis of comparative statistics. By differentiating
the equation (3) with respect to k. and kb, we can see the directions of changesof the price level:dP a '
dk.=(IIFe)(m.+m,)' (6)a=l y#+l."rZ

dP .P

dkb== (1+e)(m.+m,) , (7)piigy2+l9r2 .
where, ig EOI. / Oy., lg =- al. / Or., .y"k =- Oy. / ak., r# !O ra / Ok. for count ry A, andsimilar notations are used for country B. Since (.a, ze, y:, y2 are positive andl.", l9, r:, r2 are negative, dP/dk. and dP1dkb are positive. As the capital stockincreases, its marginal productivity decreases and a demand shift from capitalto currencies occurs. There are increases of the levels of per-capita income,which in turn increase the amount of the demand for currencies. Thus, theprice level of the currency increases.

By the changes of monetary policy, P is affected as follows:dP. - i+e <O ' . (8)deP==that is, the increase of the rate of supply of currency, accompanying a rise in

the general price level. Furthermore, when Te changes, it becomes:

dP l#+l#d7re == (1+e)(m.+m,) >O (9)because l:=-Ol. 107re, l#=-Olb /a7re are usually positive. As an increase of' the rateof returns of the currency induces an increase of the amount of currency

demanded, the general price level decreases. The effects to the balance of payinents are seen by differentiating the equation(4) and taking account of the equations (6) and (7):db dP

dka =' dh. Mb

OFSEIGNIORAGE 69
EXCHANGE RATE SYSTEMS AND DISTRIBUTION=- amb <o(1+e)(m.+mb)

dP
db..P-Mbdk,

dk,=P(1'-" (1+e)(M.6.+.,) )>O
The increase of the quantity of capita1 stock in country A causes the general pricelevel to decline, but the amount of real demand for currency in country B does
not change, and the balance ofpayments b decreases. Contrary to it, b increases
in the case of the increase in the quantity of capital stock in country B, because
the positive effect of the increase in the amount of currency demanded in country
B is larger than the negative effect through the price change.
It is easily seen that the increase of the growth rate of the amount of currency

in country A induces a balance of payments increase of countiy B. Using theequation (8), we get:db dP.= -Mb
dO
de
P
>o
==Mb
1+e

m.
In this section, we clarify the dynamic propenies of the model.

Usually, the disposable income is defined as the national income produced
minus taxes plus capital gain through holding financial assets. However, neglecting capital gain requires no serious corrections in the conclusions and makes theanalysis easier, the per-capital disposable incomes are defined as (y.--t.) and(ptb--tb) in country A and B respectively in this paper. Due to the assumptions
for the saving functions, capital accumulation in each country is formulated asfollows, taking account of the increases of the amount of currencies held :ka=Sa-- (Ya--ta)-(la+nla)--'nk. (10)kb=sb-- (yb--tb)-(l6+nlb)-nkb (11)where the dots • indicate the differential with respect to time.

We assume that the expeeted-rate of price change iseminus n, that is, theprice level on a steady growth path is expected (assuming the adaptive expectation'

for Te needs no serious corrections of the conclusions in this model).

7re=n-e (12)

KAZUHIRO !GAWA

70

Adding th4t the rate of increase of currency 0 and taxes t., tb are constant,
the whole dyfiamic system is completely determined.

Expanding the equations (10) and (11) in the neighborhood of the equilibrium values, we get the characteristic equations to obtain the following stability
conditions of this system.

s. y#-n(a+ 1)<O

sb y2-n(P+1)<O
By the assumptions as for the production functions, these conditions are satisfied

and .the variables ofthe syste;n converge to their equilibrium values. The
equilibrium values indicated with an asterisk, satisf: the following equations:''
Sa{Ya(ka*)-ta}-nla{Ya(ka*),ra(ka*)}-nka*=O (13)sb{orb(kb*-tb}-nlb{yb(k6*), rb(kb*)}-nkb*==O (14)The rate of changes of price in a steady state is:.
(i)*==n-oand this is equal to Te from the equation (12). The absolute level of price isdetermined, if the initial conditions for the amount of currencies are given.

These relations can be called a "dynamic version" of the quantity theory ofmoney. The quantity of capital stock, the amount of labour and the amount of
currency in real terms are increasing at the same rate. The balance ofpaymentsof country B can be given by substituting kb* in the equation (4). As lb* andPmb are constant - a change of P is just offset by a change of mb -, b* becomes
constant, though the absolute value of the balance of payments is increasing at thesame rate as the amount of labour.

These properties on the steady growth path are fundamenta!ly the same as
those of the Mundell's graphical analysis.{2) In short, among the four - generalprice revel, supply of currency, economic growth rate, and balanee of payments -theie are relations which might be called a "dynamic version" of the quantity

theory of money.
The propenies of the steady growth path can be seen in the analysis of thecomparative statics. By totally differentiating the equations (13) and (14), we
get the following equations:{Sa Y:-(1+a)n} dka*== -(Ya- ta)ds.+S.dt.+nl#dTe{sby2-(1+P)n}dkb*=-(yb-tb)dsb+s,atb+nl#dTe(2) See R. A. Mundell [6].

RATE SYSTEMS AND DISTRIBUTION OF SEIGNIORAGE 71
EXCHANGE
Thus, for country A:

dk.* ==- s.ptiY-'fi l)a)n >O (i5)ddki*=s.yziai+a)n <O (i6)ddkfi -,.y:-"(ii""+.). <o (i7)
We obtain the same relations for country B:

dk6* ! cls6>O, dk,* /dtb<O, dk,* !dne<O'that is, when the propensity to save increases
the capital labour ratios will increase
and the increase of the tax reduces them. The increase ofTe also reduces them,through a demand shift between currency and capital goods.
As easily seen, the many properties of the usual neoclassical growth model(3)are retained in this model, too.
rv•

In the case of a fiexible exchange rate system, there exist independent currencies and the ratios of the level of the prices vary.

Adopting the simplifying assumption that each country holds only a domestic

currency, we can obtain the essential propenies of the flexible exchange rate
system (this assumption will be relaxed later). Governments behave as follows,which correspond to the equation (1):(ea- ta) /Pa==eaMa (1-1)(eb-tb)/Pb=ebMb (1-2)

Corresponding to the equation (3); the static market equilibrium equations are:Pa(1+ea)Ma==la{Ya(ka), ra(ka), Tg} (3-1)
Pb(1+e.)mb== lb{yb(kb), tb(kb), T:} (3-2)
where, P., Pb are the price levels of currencies, e., eb the rates of increase ofcurrencies and TZ, 7rb9 the expected rates of increase of P., Pb respectively (suMxindicates country A and B). If k., kb, m., mb, Tg, TS are given, the static equ-ilibrium values P., Pb are determined uniquely and this system is stable according to the same reasoning as mentioned before.
The analysis of comparative statics is similar to the one in the above section.
Corresponding to the equation (6), (7), (8) and (9), we get the following results:

ddPk."--(1+ae.)..>O (6-1)(3) See D. K. Foley&M. Sidrauski [2].

72 KAZUHIRO IGAWA
dP, P'
dk, ' (1+e,)mb>O (7-1)

ddPo.a -`= - (llZae.) <O (8'1)'
dP, P,

de, =- (1+o,) <O (8-2)'
dPa l#
d7r.e=(1+e.)m. >O (9-1)
dP, ledTZ=(1+e,)m, >O (9-2)

Using these results, we can easily see the effects to the exchange rate level (P. / Pb)•

The following results indicate an important aspect of the flexible exchange rate
system :ddLkP:=O, ddPk:=O• ddPXrO• ddPo:=O• ddP,:.eb =:O, `dllTPS ==O'

Each economy is separated from the other through the changes of the exchange
rate level. These results are due to the assumption that each country holds adomestic currency only. When the amount of currencies held by foreigners is
relatively small, those results obtained under that assumption need not becorrected.

Because dynamic equations are the same as the equations (10) and (11),the equilibrium values of k. and kb are determined and system is stable. Corres-

ponding to the equation (12) we assume:

7r.e=n-e. (12-1)
Tg =n-e, (12-2)

that is, the expected rates of increase of the price levels are equal to the pricelevels on a steady growth path. Then, a "dynamic version" of the quantity
theory of money holds here, too. The rate of changes of the exchange ratelevel on a steady growth path is;(Pa iPb)" / (Pa /Pb)*==(Pa /Pa)*'(Pb /Pb)*=eb-e.
that is the exchange rate level is changing at a constant rate, which is the differenceof the rates of supply of currencies in both countries. The dynamic propertiesof this system are similar to those in the previous section, that is:

ddk,.a>O, ddk,,b'>O, ddk,.a<O, ddk,:<O, dd.ka..<O, Sk.bz<O'

EXCHANGE RATE SYSTEMS AND DISTRIBUTION OF SEIGNIORAGE 73v.
The seigniorage is proportional to the amount of currency issued, if thecost of producing and maintaining one unit of currency and the rate of interest(the discount rate) are constant.(`} The above analysis shows that when neither
country holds any foreign currency in the case of the flexible exchange rate system,

there is no international distribution of seigniorage and when only one country
issues new currency in the fixed exchange rate system, the seigniorage is obtained

only by the country.
In this section, we relax the assumptions which were useful to make clear
the properties of each exchange rate system and see how seigniorage is distributed internationally in this case.{5)At first, we analyze the case of the fixed exchange rate system. If thebalance of payments equilibrium is maintained by a trade policy, no international

distribution of seigniorage will occur. But the cost for the continuation of thepolicy will be high when a basic disequilibrium exists. In the case that country

B cannot issue domestic currency without increasing its foreign reserve, as in
the above case, the international equity of distribution of seigniorage is attainedin a growing economy only when the increase of the amount of the key currency

is zero. If this assumption is relaxed and both countries can issue currency
independently, the international equity can be attained, even if we assume thatthe currency of country B is not held by country A.

We can describe this case in the following way. Equity is attained
only when each country increases the amount of the domestic currency just to
meet the amount of the increased demand for it. As the amount of increased
domestic currency is exactly equal to the amount of the demand for the currency

in country B, the barance of payments equilibrium is maintained. In this case,however, the ratio of the foreign reserve to the amount of the domestic currency

is decreasing, and this policy cannot easily be continued, unless the currency

control is perfect. This is the case which R. A. Mundell calls a "Defensive

monetary expansion in B."(6} Though country A can continuously get seigniorage, country B cannot, because the amount of foreign reserve cannot be.
negatlve.
Next, we analyze the case of the flexible exchange rate system. If eachcountry hold foreign currency, the problems of the international distribution(4) See H. G. Grubel [3] and H. G• Johnson [41.
( 5 ) Empirical analysis was under taken by B, J. Cohen [1].

(6) See R. A. Mundell [6], pp. 380-390.

74 KAZUHIRO IGAWA
of seigniorage occur.(7) Because the international movement of currencies is
not equal zero, even if the foreign exchange markets are cleared. The modelof this case is almost the same as the one in the previous section, except that therates of the returns of foreign currencies enter into the demand functions for cur-rencies. The balance of payments is defined for convenience as an increase of
the amount of currency which country B holds in country A minus the increaseof the amount of currency which country A holds in country B. On the steady
growth path, the exchange rate is changing at a constant rate and the surplusof payments in real terms remains constant.
If the currency of country A is used for international transaction, country A
gets seigniorage, this is the same as in the case of the fixed exchange rate system.

But, if the currency of country B is as a profitable asset in country A, bothcountries can get seigniorage. The determination of the share of distribution

depends on the balance of payments as defined above. The amount of currency
over-issued in country A must be held in country B, but, it is not so easy as in
the case of the fixed exchange rate system for country A to get seigniorage, be-cause the rate of returns of the currency of country A has decreased. As therate of returns of country B's currency has increased relatively, the amount ofdemand for it increases and the share of seigniorage distribution to country A

is not very large. Thus country B can get a larger share of distribution ofseigniorage by controlling the rate of returns of her own currency.
We cannot say definitely, which exchange rate system has superior properties
in distributing the seigniorage internationally. Even in the case of the flexible

exchange rate system, there may be an unfair distribution of seigniorage, if
the amount of demand for foreign currency in each country is large. However,
it is important that the results depend on monetary policy, such as the controlof the rate of increase of the amount of currency or on international arrangements for payment mechanisms or for the limitation to the demand for currencies.

Concluding Remarks
Whatever exchange rate system may be used, it is always easy to get seignior-age for a country whose currency is used for international transactions. Thus,
from the view point of equity of international distribution of seigniorage, fairsystem are those where all currencies are used equally.(S) The system in which
only special currencies, issued by an international bank, are used for international( 7 ) See R. I. McKinnon [5], pp. 17-23, especially p. 18, where he comments on Grubel [3]•(8) See H. G. Grubel [31, pp. 280-281.

EXCHANGE RATE SYSTEMS AND DISTRIBUTION OF SEIGNIORAGE 75
transactions and in which domestic currencies of each country circulate only
domestically, is one of them. The gold standard system is alike to it.
In the case of the fixed exchange rate system, mechariisms to maintain thebalance of payments equilibrium, must be introduced. They may be internationally cooperated monetary policies or liquidity distributions by some international monetary organization.{9)In the case of the flexible exchange rate system, mechanisms or systems
to make the demand for foreign currency small are necessary such as the wellestablished forward exchange market or an international cooperation system toreduce speculative, transactions and precautionary demands for foreign currencies.

Indeed the international distribution of seigniorage is important, we must

remember that it is only one of the many elements which must be taken into
account when we consider international monetary systems or the exchange rate
systems.

REFERENCES[ 1 ] Cohen, B.J., "The Seigniorage Gain ofan International Currency: An Empirical Test,"
9uarterly Journal of Economics, Vol. LXXXV, No. 3, August, 1971.
[ 2 ] Foley, D. K. & M. Sidrauski, Monetary and Fiscal Policy in a Groaving Economy, (London;

Macmillan), 1971.
[ 3 ] Grubel, H. G., "The Distribution of Seigniorage from lnternational Liquidity Creation,"in R. A. Mundell & A. K. Swoboda (eds.), Monetary Problems of the International
Economy, (Chicago; University of Chicago), 1969.
[4] Johnson, H. G., "Appendix: A Note on Seigniorage and the Social Saving from Substituting Credit for Commodity Money," in R. A. Mundell & A. K. Swoboda (eds.),
Monetary Problems of the International Economy, (Chicago; University of Chicago),1969.
[ 5 ] McKinnon, R. I., "Private and OMcial International Money: The Case for the Dollar,"Princeton Essays in International Finance, No. 74 (Princeton; International Finance

Section), 1969.
[6] Mundell, R. A., "The International Distribution of Money in a Growing World Economy," in J. N. Bhagwati, R. W. Jones, R. A. Mundell & J. Vanek (eds.), Trade, Balanceof Payments and Growth, (London; North-Holland), 1971.

(9) H. G.

Grubel [3]calls

it a "demandsolution."

KOBE ECONOMIC & BUSINESS REVIEWCONTENTS
NO. 14 (1967)
A Return on the Confirrned Settlement of Accounts.....................Susumu VVatanabe

Problems of Regional Industrial Development
Relating to National Planning in Japan...........................Minoru Beika

The Development of Japanese Trade with the British
Commonwealth in Asia.............,..................................Fukuo Kawata
On the Kihansen (Japanese Wooden Coastwise Vessels)........................Serl'i Sasaki
Approaches to Company History.....................................,.............Tadakatsu Inoue

Cumulated Cost Ratios for the ECAFE Countries..............................Nobuko Nose'
International Liquidity Controversy in Japan (1)...........................Masahiro Fuiita

Investment Criterion for Maximizing
the Rate of Capital Accumulation.................................Hikoii Katano

Peculiarities of Maritime Labor-With Special Reference to the
Supply of Maritime Labor-..............................Hiromasa Yamamoto
Los Estudios Del Brasil En El Jap6n-Con Referencia a las Ciencias Sociales..........,....Yoshiaki Ndshimukai

NO. 15 (1968)
Characteristic Approach for Regional Deve!opment in Western Europe
and U.S.A.-Relating to the Case in Japan..................Minoru Beika
Export Patterns of Leading Industrial Countries..............................Fukuo Krawata
The Early Development of Kobe Port......v...............................,........Sei'i Sasaki
Rise of Modern Shipbuilding in Japan and Promoters........................Tadakatsu Inoue
A Note on the Redistribution. of Profits.............................................Nobttko Nose'
International Liquidity Controversy in Japan (2)...........................Masahiro Ful'ita

Factors to Determine the Relative Share: The Case of India............Hikoii Katano
Maintenance of Capital Based on Earning Power ...................................Jiro Ono
Recent Changes in Japan's Trade with Latin America and Brazil. . . . . . Yoshiaki Nishimukai
Some Inventory Accounting Problems............,...................................Isao Nakano
Organizational Slack and Adaptive Behaviour in the Firm..................Hideki Yoshihara'NO.
16 (1969)

The Change of Regional Characteristics of Industries in Japan...,,.......Minoru Beika
Functions of Screen Account .........................................................Nobuko Nose'On Mr. Stoleru's Optimal Policy for Economic Growth.....................Hikoii Katano
A Note on Shorter Working Hours for Searnen......................,.Hiromasa Yamamoto
Objectivity Reexamined ...............................,..................,...............Isao Nakano

A Note on the Behavioral Theory of Innovation...........................Hideki Yoshihara

NO. 17 (1970)
An Outline from Ofice Management to MIS in Japan........................Minoru Beika

Japanese Economic Growth since the Meiji Restoration:
A Social Accounting Approach ..,.................................Nobuko Nose
Efliciency of Optimal Growth Policies for Development........,...............Hikoji Katano

Decasualization of Dock Labour-Experiences at the Port of Kobe-..................Hiromasa Yamamoto
The Characteristics of Recent Corporate Mergers in Japan...............,........Jiro Ono

Estudos Brasileiros no Japgo ..•••........................................ Yoshiaki Nishimukai

A Note on the Integration of Economic Theory
and Organization Theory ..........................................Hideki Yoshihara

NO. 18 (1971)
Environmental Pollution Problems from theView Point of Business Management ..............................Minorte Ber'ka
Patterns of the Japanese Engineering Trade (1951-1970) ..................... Fukuo Kawata
Optimal Process of Economic Development .................................... Hikoii Katano

Wage and Behaviour Difference in Collective

Wage Bargainings of Japanese Shipping Companies-A Case Study of the Japanese Shipping Industry .................. Hiromasa Yamamoto
On Accounting Communication...,....................................,...........,....Isao Nakano

KOBE UNIVERSITY ECONOMIC REVIEW 18, 1972
Edited by Faculty of Economics,
Kobe University, Kobe, JapanCONTENTS
A Formal Proof of Marx's Two Theorems................................. Nobuo Okishio
Drastic Revision of Medical Insurance

Laws and Policies of Medical Care
Cost in Japan .................."......................... Masafumi Nakamura
Towards a New Look on the Analysis of Devaluation..................... Klyoshi Ikemoto
Silk Production in Medieval Japan..............................,................. Tetsuo Kamiki

Wage Adjustment and the Expectations Hypothesis:
Some Empirical Evidence for Japan ........................ Toshihisa Toyoda

Optical Investment Policy and Growth
Equilibrium ............................................................ VVataru Fuhuda.--tteli--..-ti...--tlttS--,..-t....ltillii.-.-i-...q-tiltl--,,,-t...-t-IItlt.E.ie-.,--dtlSlli-...l--,,iltt:it-...1-.-.--lti-1--..-.t-...-tltlil-.,-I-...-tt--lett-...l-.---lttll--...et...--tlttll--..-tt,.--etltl---

THE ANNALS OF THE SCHOOL OF
BUSINESS ADMINISTRATIONKOBE UNIVERSITY 1972
Edited by the School of Business Administration,

Kobe University, Kobe, JapanCONTENTS
Die unternehnetlsche Ehtscheidung und ihre Bedeutung
ftit den ttitirktwirtschaftlichen ProzeB ................................. Karl Hax

Die MitbestirnMtihg det Arbeitnehner in der Bundesrepublik
Deutschtand .......................,........................••............. Fritx Voigt

Die staatliche F6rderung von Auslandsinvestitionen derdeutschen Industrie ...........................•..........•.........Dieter Schneider

Der Ausweis vom Konzerngewinn im aktienrechtlichen
Konzernabschluss..............,................•...........••......MasatoshiKuroda

A Functionalist's "Systems Concept" in Marketing ...................,. Masanori Tamura
Vber die Theorie der Preisbildung in der Linienschiffahrt ............... Kunio Miyashita-tll----.-t--t-4tLll--q-itt-'.---ttllti--'--lbt.--llitliit-tdt-'t41-dl"I-i-t.itttt--lltlt--ttt-l-tt-q-rt-4i--thd-'t./d]"Jl--t'.-t'..---Irldi-t',.t-'.---llSll-'t,tl''---dlll---'t.-t'.tt+ttttl--'.ta-'.tt-id"tl--.,.ql

KOBE UNIVERSITY LAW REVIEWInternational Edition No. 8, 1972
Edited by Facu1ty of Law
Kobe University, Kobe, JapanCONTENTS
Student Protest and the•Arnerican University: A Case Study ......... Samuel Mermin

Two Types of Exchange and Two Sourc}s of the Law of Exchange.................. Taneomi KrunitoshiTHE RESEARCH INSTITUTE FOR ECONOMICS AND
BUSINESS ADMINISTRATION, KOBE UNIVERSITYHISTORICAL SKETCH
In 1919, a research organization named the Institute for Commerce wasfounded in Kobe Higher Commercial School, one of the chief predecessors ofKobe University, with a gift made by F. Kanematsu & Company, a leading
mercantile firm in Kobe. The organization was designed to carry on and facilitate integrated research on business and commerce and to formulate andpublish the results of these studies and investigations in such form as to makethem available to the business community.

With the founding of Kobe University of Commerce, successor of Kobe
Higher Commercial School, in 1929, the Institute extended its research activities by adding several divisions. One was the famous Latin-American
Library, which soon became the center of research in this field in Japan. A
room for statistics equipped with various computing machines was establishedand began publication of Jayo Keixai Tokei monthly and Sekai Boeki Tokeiannually. A filing room was prepared to deposit press clipping files systematicallyarranged by topics and dates. Another room was designed to become the centerof all possible original records and data having to do with the beginning andprogress of Japanese business.

On the campus of Kobe University of Comrnerce, another organization
named the Institute for Business Mechanization was founded in 1941 utilizing

business machines donated by the IBM Corporation and others. With
Professor Yasutaro Hirai as its head a broad and forward-looking plan forbusiness mechanization in Japan was developed.

' In 1944, Kobe University of Commetice changed its name to Kobe University of Economics. After the war, howeveti, the University was consolidated with three other colleges in Hyogo Prefecture to become Kobe University.

With this development, the two Institutes were also ama!gamated into the
Research Institute for Economics and Busines$ Administration, Kobe University. At present, the Institute, with its twenty fu11-time professional staff

members, carries on studies and investigations in international ecbnomy,business administration, and information systems in Japan.

LOCATION AND BUILDINGSThe Research Institute for Economics and Business Administration is
located on the campus of Kobe University, Rokko, Kobe. It is a three-storiedbuilding named the Kanematsu Kinenkan and has a fioor space of about 2,900
square meters, which includes a president's room, forty-one oMces, six rooms
used as a library, a room for statistics, three conference rooms, etc. Adjoining
is a one-story building recently built to install business machines.

ORGANIZATION
Under the directorship of the president, the Institute operates with two
research groups, each has five sections respectively. Each research groupand its sections are as follows:

A Group of lpternational Economy(1) International Trade(2) International Finance(3) Maritime Economy(4) Economy of Latin-America(5) International Law of Economy

B Group of Business Administration(1) International Management(2) Business Administration and Information Systems(3) Accounting(4) Business Statistics(5) International Labor Problems
Besides the regular work of the Institute, research committees may be createdto carry on any special work requiring the joint study of academic and businesscircles. At present, there are three committees, that is, International FinanceCommittee, the Committee of International Economic Cooperation and Overseas
Business Operations in 1970's and Information Systems Committee.
For convenience and greater eMciency in carrying out its research activities,

the Institute has a general oMce which is responsible for 1) the collection andpreservation of a comprehensive co!1ection ef books, periodicals, pamphlets,and original records and data of finance, trade, cornmerce, industry and businessgenerally; 2) the classification, cataloguing, indexing, arranging, annotation andcompilation of these research materials; and 3) the formulation and publicationof the results of the investigations and studies accomplished by the professional
staff members of the Institute.

As an athliated institute, the Documentation Center for Business Analysis
has been established. It is the first systematic information facility in thefield of business administration in Japan that has been recognized andauthorized by the Ministry of Education. The purpose is to collect and to
make intensive control of all kinds of materials on business administrationand to make them available to scholars, universities, governments, and businessworld with the aid of modern documentation techniques.

-e- Tr-P-FP - --

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RESEARCH ]NSTITUTE FORECONOMICS & BUSINESS ADMtNISTRATIONKOBE UNIVERSITY

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Director: Seiji SASAKt

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Secretary: Tatsuo KURoDAl1
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GROUP OF INTERNATIONAL1i
ECONOMIC RESEARCH l

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Fukuo
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KAWATAlt

Professor of !nternatienal

FinanoeDr. of Econornics

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Professor of International

Masahiro FUJITA

Professor of Internatienal

FinanceDr. of Economics
Professor of Internatienal

Hikoji KATANO

Trade
Dr. of Economics
Ph. D. in Statistics

Hirornasa

Associate Professor of
YAMAMOTO

Maritime Economy
Yoshiaki

NISHIMUKAI Associate Professor of Regional Study on Latin

America

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Kazuhiro IGAWA

Research Associate ofInternational Trade

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Akio MoRlll

Professor of Businessli

FinanceliDr.' of Business

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Nobuko NossEl

Profescor of Bueinese

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StatisticeDr. of Business Admin-

Isao NAKANO

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Associate Professor ofilI

Accounting

Hideki YosHIHARA
H;roehi SADAMICHt

Associate Professor ofInternatjonal Managernent i
Associate Professor of
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Ph. D in 1tconornetrics

Komayuki ITo:1

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Law:

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Dr. of Business Adminis.

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TOru KANo

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Profeesor of Business

Administration and:EconomyJiro YAo

Minoru BEIKAlli

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Professor of Maritime

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Professor of Regional

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Dr. of Economicetll

GROUP OF BUSINESS
ADMtNISTRATION RESEARCH

Kanematsu Memorial Hall

KOBE UNIVERSITYROKKO, KOBE, JAPAN

Associate Professor of
Business Adrninistration

and Information Systems

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