Aggregate Output with Operating Rates and Inventories as Buffers BetweenVariable Final Demand and Quasi-Fixed Factors
Empirical evidence has long shown that output varies more in the short-run than do all factor inputs, including employment and hours worked. There is also evidence that all factors, including capital, start adjusting within a few months, suggesting that production models should treat all measured factor inputs as quasi-fixed. In such a context, long-run equilibrium involves the choice of average factor proportions, including an average operating rate, that minimize total costs of producing the desired level of output. In response to unexpected or temporary changes in demand or cost conditions, optimal temporary equilibrium involves some changes in factor demands coupled with the joint use of pricing and production decisions to make best use of the buffering capacity provided by inventories and operating rates. Applying this framework to aggregate annual data, this paper concentrates on the econometrics of the production or operating rate decision, since the operating rate is the key adjusting variable in the short-run. The operating rate decision also reveals most clearly the important consequences of quasi-fixity, and shows how our model contrasts with more conventional treatments. Other models of temporary equilibrium of production usually assume either the strict applicability of the underlying production function (requiring the assumption of either completely flexible product prices or at least one fully variable factor if quantity rationing is not to take place) or that current output is determined by aggregate demand without reference to the production function constraint. The assumed long-run production structure is two-level CES, with the inner function's vintage bundle of capital and energy combining with efficiency units of labour in the outer function. Long-run average cost minimization assumptions are used to derive the parameters of the production function, assuming constant returns to scale and constant growth of labour efficiency. These assumptions about the functional form and properties of the long-run production function are tested against various alternatives in the context of the derived temporary equilibrium output decision.
|Date of creation:||Jun 1985|
|Date of revision:|
|Publication status:||published as Chung, Alan and John F. Helliwell. "Aggregate Output with Variable Rates of Utilization of Employed Factors." Journal of Econometrics, Vol. 33, (1986) .|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Gordon, Robert J, 1981.
"Output Fluctuations and Gradual Price Adjustment,"
Journal of Economic Literature,
American Economic Association, vol. 19(2), pages 493-530, June.
- Lazear, Edward P, 1981. "Agency, Earnings Profiles, Productivity, and Hours Restrictions," American Economic Review, American Economic Association, vol. 71(4), pages 606-20, September.
- Martin Neil Baily, 1974. "Wages and Employment under Uncertain Demand," Review of Economic Studies, Oxford University Press, vol. 41(1), pages 37-50.
- Berndt, Ernst R & Morrison, Catherine J, 1981. "Capacity Utilization Measures: Underlying Economic Theory and an Alternative Approach," American Economic Review, American Economic Association, vol. 71(2), pages 48-52, May.
- Foss, Murray F, 1981. "Long-Run Changes in the Workweek of Fixed Capital," American Economic Review, American Economic Association, vol. 71(2), pages 58-63, May.
- Blinder, Alan S, 1982.
"Inventories and Sticky Prices: More on the Microfoundations of Macroeconomics,"
American Economic Review,
American Economic Association, vol. 72(3), pages 334-48, June.
- Alan S. Blinder, 1981. "Inventories and Sticky Prices: More on the Microfoundations of Macroeconomics," NBER Working Papers 0620, National Bureau of Economic Research, Inc.
- Blinder, Alan S, 1981.
"Inventories and the Structure of Macro Models,"
American Economic Review,
American Economic Association, vol. 71(2), pages 11-16, May.
- Patrick Artus, 1983. "Capital, Energy and Labour Substitution: The Supply Block in OECD Medium-Term Models," OECD Economics Department Working Papers 2, OECD Publishing.
- Ernst R. Berndt & Melvyn A. Fuss, 1982. "Productivity Measurement Using Capital Asset Valuation to Adjust for Variations in Utilization," NBER Working Papers 0895, National Bureau of Economic Research, Inc.
- Morrison, C. J. & Berndt, E. R., 1981. "Short-run labor productivity in a dynamic model," Journal of Econometrics, Elsevier, vol. 16(3), pages 339-365, August.
- Berndt, Ernst R & Wood, David O, 1979. "Engineering and Econometric Interpretations of Energy-Capital Complementarity," American Economic Review, American Economic Association, vol. 69(3), pages 342-54, June.
- Fuss, Melvyn & McFadden, Daniel, 1978. "Flexibility versus Efficiency in Ex Ante Plan Design," Histoy of Economic Thought Chapters, in: Fuss, Melvyn & McFadden, Daniel (ed.), Production Economics: A Dual Approach to Theory and Applications, volume 1, chapter 7 McMaster University Archive for the History of Economic Thought.
- M. S. Feldstein, 1967. "Specification of the Labour Input in the Aggregate Production Function," Review of Economic Studies, Oxford University Press, vol. 34(4), pages 375-386.
- Hay, George A, 1970. "Production, Price, and Inventory Theory," American Economic Review, American Economic Association, vol. 60(4), pages 531-45, September.
- Lawrence R. Klein, 1958. "The Measurement of Capacity," Cowles Foundation Discussion Papers 49, Cowles Foundation for Research in Economics, Yale University.
- R. L. Hall & C. J. Hitch, 1939. "Price Theory And Business Behaviour," Oxford Economic Papers, Oxford University Press, vol. 0(1), pages 12-45.
- Roger Gordon, 2006. "Editor, Journal of Economic Literature," American Economic Review, American Economic Association, vol. 96(2), pages 510-511, May.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:1623. See general information about how to correct material in RePEc.
If references are entirely missing, you can add them using this form.