Expectations of future returns which Influence the perceived benefits of capital movement 2. The technology of the adjustment process which determines the costs of capital movement This article divides its discussion into five different sections as detailed below. Section l: displays a simple model of the technology of capital movement which preserves the long-run properties of the HOSE model. The Basic Model This model depicts a small open economy which produces two goods, X and Z, and takes the relative price of X In terms of Z, P as given.

Production of each good requires labor and capital The production function Is as follows *Production of X is assumed to be capital intensive at every age-rental ratio Z = G (Liz, Oz). (2) Labor is freely mobile between industries but Capital is assumed to be a quasi-flexed factor. To transfer a unit of capital from X production to Z production (or vice versa), a capital owner must purchase the services of a capital-moving firm. These specific resources do not include any capital which could be used to produce X or Z.

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The capital-movement industry Is assumed to be competitive and the technology for the industry is assumed diminishing returns to the variable factor I. E. Al = b k, b > O, The demand for labor in each of the final goods industries depends on the wage rate measured in terms of Z), w, and on the amount of capital in that industry. Given K, it follows that the demand for labor in the two final goods industries depends on w and on the distribution of the capital stock, represented by Xx.

The demand for labor In capital movement depends, according to (3), on the rate of capital movement, K. The last property follows from the assumption that X is relatively capital intensive. For any individual capital-moving firm, total (variable) costs are w Lie = w b (Ski) 2, where Lie is the amount of labor used by this firm. Competition requires that each capital-moving rim charge a price for capital movement equal to the marginal cost of providing the service.

By moving a unit of capital from one industry to another, the owner captures the difference between the values of a unit of capital In the two Industries. The rate AT capital movement at any moment AT time Is eternal Day ten contralto Tanat ten marginal cost of capital movement must equal the marginal benefit: The shape of the marginal cost curve insures that the adjustment process will have three desirable properties: First, since the marginal cost of capital movement is an increasing unction of k, there is an economic incentive to distribute adjustment over time rather than do it all at once.

Second, since the marginal cost of capital movement, at K = O, is zero, the economy can ultimately converge to the long-run equilibrium of the HOSE model in which the returns to capital and hence the values of capital in the two industries are equalized. Third, since in the region of K = O the marginal cost curve is approximated by a ray through the origin, when the economy is near its long-run equilibrium the rate of capital movement will be roughly proportional to the preference between the values of capital located in the two industries.

Section II: describes the process of adjustment under this model of technology, when capital owners have static expectations concerning wage rates and returns to capital. Under static expectations, capital owners expect the current wage rate and the current value of the marginal product of capital in each industry to persist indefinitely Section Ill: demonstrates the importance of expectations by comparing the results of Section II with those obtained for the same technology when capital owners have “rational” expectations.

This section has a major difficulty with the analysis of the preceding section because the author views that the static expectations are incorrect, except when the economy has reached its long-run equilibrium. Along the adjustment path, the wage rate, and hence the values of the marginal products of capital in both industries, are changing continuously. The author states that by using a technique developed by Lucas (1966), it is easy to compare the path of the economy under rational expectations with the path of the economy under static expectations. The economy converges to its long-run equilibrium more rapidly under static expectations than under rational expectations. Section lb. Takes up alternative specifications of the technology of adjustment 🙁 Linear Labor Requirements, Capital Formation with increasing marginal Costs, Industry-specific Adjustment Costs When marginal adjustment costs are positive, even at a zero rate of capital movement, the equilibrium of the HOSE model is not, in general, achieved, even in the long run.

When capital is a producible, depreciating resource (rather than simply movable from one industry to another), the properties of the HOSE model are preserved with respect to the long run behavior of factor prices. Section V: discusses the role of public policy in the adjustment process. When expectations are “rational” and there are no distortions, public policy plays no useful role since the process of adjustment is efficient in the sense that the present discounted value of the economy’s output is maximized.

When expectations are not rational, appropriately designed policies may increase the efficiency of the adjustment process. If expectations are rational and if there are no other distortions in the economic system, then the adjustment path of the economy will be efficient. In such circumstances, government intervention into he adjustment process can only reduce the efficiency of this process and drive the economy to an inappropriate long-run equilibrium.

Non-rational expectations distort the adjustment process by inducing capital owners to assign incorrect values to units of capital located in different industries. This leads to a rate of adjustment which is too Taste or too slow, measures gallant ten criterion AT maximizing ten present discounted value of’ the economy’s final output. *The appropriate policy to correct the distortion created by non- rational expectations is a tax or subsidy which directly intervals the distortion.

Difficulty: several complex equations in sections to 5. 2. The Validity of the Long-run Hecklers-Olin Theorem in the Arcadian System By Attacks Chimera: Wasted University, Tokyo This paper applies Arcadian two-sector growth model to the two -country open economy to show that the long-run Hecklers-Olin theorem holds also in a Arcadian world.