An Aggregate Model with Multi-Product Technologies

Publisher Summary This chapter discusses recent developments in the theoretical literature to explore the possibilities of specifying and testing a production sector for a macroeconomic model and provides some estimates of a model for Canada. In macroeconomic models, the production sector has often been specified and estimated without detailed attention to the underlying economic theory. The usual statistical sources of aggregate data for a national economy provide information on employment, imports, and outputs flowing to final demand. Problems arise because of the inconsistencies of data collection systems which do not permit the straightforward application of the economic theory of production to the building of macroeconomic models. Another source of the slackness of the underlying theory is the early prevalence of Keynesian models that were heavily oriented toward demand explanations for aggregate behavior. The estimates of the price elasticities of demand and the elasticities of substitution for the inputs are relatively insensitive to alternative specifications that assume jointness or separability in outputs, and inputs of the function representing the technology. The estimates of the slope of the production possibility curve are more sensitive to the alternative specifications. Large differences in the estimates of the marginal rate of transformation occur.