Industrial output and factor input determination in an econometric model of a small open economy

Abstract

A correct approach to the modelling of the supply structure of the manufacturing sector of a small open economy (SOE) represents the single most important aspect of any economy model. To date, much of the empirical modelling of output and factor inputs in SOEs has been ad-hoc and a serious source of model instability. We comment on how these issues have been treated in regional and SOE models. We outline a general production function framework for the analysis of capacity output and long-run factor demands in a world consisting of SOEs. In the special case where the factors of production of each country are homothetic in world output and weakly separable from the factors in all other countries, then the complex general formulation can be decomposed into a series of simpler ones. Such restrictions are not unrealistic. We show how this approach can be implemented in practice. Empirical results for the Irish economy are presented. © 1988.