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Translog Production Function

1. The document derives the translog production function form from the constant elasticity of substitution (CES) production function form. It takes the log of the CES form and expands it using a Taylor series expansion to arrive at the translog form. 2. It then outlines how the translog production function can be used to test the Stolper-Samuelson theorem. It derives the factor share equations and the Stolper-Samuelson elasticities from the translog form. 3. The key results are that the factor shares are functions of relative factor and good prices, and the Stolper-Samuelson elasticities equal the good's output share plus a term involving the parameter that

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Mandar Priya Phatak
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343 views8 pages

Translog Production Function

1. The document derives the translog production function form from the constant elasticity of substitution (CES) production function form. It takes the log of the CES form and expands it using a Taylor series expansion to arrive at the translog form. 2. It then outlines how the translog production function can be used to test the Stolper-Samuelson theorem. It derives the factor share equations and the Stolper-Samuelson elasticities from the translog form. 3. The key results are that the factor shares are functions of relative factor and good prices, and the Stolper-Samuelson elasticities equal the good's output share plus a term involving the parameter that

Uploaded by

Mandar Priya Phatak
Copyright
© © All Rights Reserved
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
Download as doc, pdf, or txt
Download as doc, pdf, or txt
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1

Derivation of Translog form from CES form


The constant elasticity of substitution form of production function can be written as:

y A 1 X 1 2 X 2

.(B1)

The CES form shown above has constant elasticity of substitution given by,

1
1

Taking the log on both sides of the equation (B1) it becomes,


ln y ln A

1
ln(1 X 1 2 X 2 ) .(B2)

Let f ( ) ln(1 X 1 2 X 2 ) ...(B3)

1 X 1 ln X 1 2 X 2 ln X 2

1 X 1 2 X 2
..(B4)
f '( )

f ''( )

(1 X 1 2 X 2 ) 1 X 1 (ln X 1 ) 2 1 X 1 ln X 1 2 X 2 ln X 2 1 X 1 ln X 1 2 X 2 ln X 2

X
1

2 X 2

Expanding f in a Taylor series around 0 and taking terms upto the second order:
Taylor series around 0 upto second order can be given as:
f ( ) f (0)

f '(0)
f '(0) 2

..
1!
2!

f (0) ln(1 2 )
f '(0)

ln X 1 2 ln X 2
1 2

f ''(0)

1 2
2
2
ln X 1 ln X 2 2 ln X 1 ln X 2
2

1 2

(B6)

ln X 1 2 ln X 2
21 2
(ln X 1 ) 2 (ln X 2 ) 2 2ln X 1 ln X 2
f ( ) ln(1 2 )

2
1 2
2 1 2
Substituting the value of f ( ) in equation (B2),
ln y ln A

ln(1 2 )
1
2
1 2 1
2

ln X 1
ln X 2
ln X 1
2

1 2
1 2
1 2 2

1 2 1
1 2 1
1 2 1
2
ln X 1 ln X 2
ln X 1 ln X 2
ln X 2
2
2
2
1 2 2
1 2 2
1 2 2

ln y a00 a01 ln X 1 a02 ln X 2 a11 ln X 1 a22 ln X 2 a12 ln X 1 ln X 2 a21 ln X 1 ln X 2


2

From the equation some restrictions should be applied,


a01 a02


1
2

1 2 1
1 2 1 2 1 2

a11 a12

a12 a21

1 2
1 2

a22 a21 0
2
2
1 2 1 2

1 2
2
1 2

These are the conditions of homogeneity of degree one in prices and they are necessary
to maintain symmetry of cross effects.

Testing of Stolper Samuelson Theorem using Translog Production


Function Form:
Let there be N goods and M factors of production. The translog function can be written
as:

ln G a00 a 0i ln pi
i 1

M
1 N N
aij ln pi ln p j b0 k ln Vk

2 i 1 j 1
k 1

N M
1 M M
bkl ln Vk ln Vl cik ln pi ln Vk

2 k 1 l 1
i 1 k 1

Where Pi is price of i th good and Vk is the supply of k th factor. Symmetry of cross


effects requires:
a ij a ji

And bkl blk


Linear homogeneity in V and P requires,

a
i

a
i

k b0 k 1

oi

j a ij k bkl l bkl i cik k cik 0

ij

Assuming output of good i :


y i f Vi

Output is the function of factor inputs. Here objective is to maximise the GDP function,
N

G pi y i
i 1

Subject to:
holds,

V , where V is the total factor input. G is maximum when inequality

G pi f Vi
i 1

pi f V1 pi f Vi
i 2

N
N

p1 f V Vi pi f Vi
i2

i2

From the envelope theorem, we can differentiate this with respect to p and V , holding
the optimum input choices Vi constant.
G
yi
p i

ln G G p i y i p i

si
ln pi p i G
G

This is share of good i in GDP.

Similarly,

G
wk
Vk

This is price of ith factor.

wV
ln G
G Vk

k k sk
ln Vi Vk G
G

This is share of GDP devoted to factor k.

Derivation of Share Equation:

si

N
M
ln G
a0i aij ln p j cik ln V
ln pi
j 1
k 1

Imposing the condition to maintain homogeneity of degree one in prices,


N

a
j 1

ij

0 ai1 a ij
j 2

k 1

k 2

cik 0 ci1 cik


N

j 2

k 2

si a 0i ai1 ln p1 aij ln p j cik ln Vk ci1 ln V1

j 2

j 2

k 2

k 2

s i a 0i a ij ln p1 aij ln p j cik ln V1 cik ln V

Vk
V1

si a0i cik ln
k 2

j 2

pj
p1

aij ln

There are N-1 independent equations. Similarly,

sk

M
N
ln G
b0 k bkl ln V1 cik ln pi
ln Vk
l 1
i 1

Imposing the condition to maintain homogeneity of degree one in prices,


M

l 1

l 2

i 1

i 2

bkl 0 bkl bkl


cik 0 c1k cik

l 2

i 2

s k b0 k a k1 ln V1 bkl ln Vl cik ln pi c1k ln p1

l 2

l 2

i 2

i 2

s k b0 k bkl ln V1 bkl ln V1 cik ln p1 cik ln p i

N
Vl
p
cik ln i
V1 i 2
p1

s k b0i bkl ln
l 2

There are M-1 independent equations.

Derivation of Stolper Samuelson Elasticities:


Wages can be expressed as:

wk

sk G
Vk

The Stolper Samuelson elasticities can be expressed as,

eki

ln wk wk pi

ln pi
pi wk

p i s k G
wk Vk p i

pi
s
G
G k
sk
sk G
pi
p i

From equation .. we have wk Vk s k G

eki

pi G pi s k

G pi s k p i

eki

pi G ln G

si
G pi ln pi

s k

p i pi

l 2

bok bkl ln

p
V1 M
cik ln i
Vi i 2
p1

Differentiating equation with respect to pi


p i s k
p c
c
i ik ik
s k pi s k p i
sk

Substituting equation and in we get

eki si

cik
sk

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