Econometricmodel of industry, profits, and tatonnement adjustment
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Date
1969Author
Allingham, Michael Gould
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Abstract
This study presents a quantitative analysis of one of the
main forces in an economy, disaggregated short term profits,
and of the process whereby the system adjusts itself to the
temporary equilibrium indicated by such forces, a generalised
tatonnement.
Quarterly ten-equation econometric models explaining
industry behaviour and profits are developed from a basic
industry model for ten mutually exclusive and exhaustive
industries. These models are connected with each other and
with the whole by a number of linkages and by being embedded
in a skeletal economy model.
The system is solved at two levels. Firstly the industry
models are solved individually for given values of the linking
variables; the results are used to choose between alternative
specifications of the models and to assess the adequacy of
the formulation adopted. Secondly the whole system is solved
iteratively by solving the industry models for some given trial
values of the linking variables, using these solutions to
derive new trial values, and repeating the process until these
values converge; the results are used to assess the efficacy
of the tatonnement process.
The results indicate that the models proposed are good predictors of disaggregated short term profits and that the
tatonnement process used produces rapid convergence to a
consistent equilibrium. It is also suggested from the discrepancy between the tatonnement (quasi-competitive) and actual
(imperfectly competitive) solutions that the capitalist system
is inefficient in that it produces too much.