TECHNICAL APPENDIX

Marvel Ganda Alvaro - 1906417161

 THE PURPOSE OF APPENDIX
• Analyze a few of the more technical points underlying the
econometric formulation in the text and to outline the rationale
behind the specific choice we’ve made among the various
competing procedures.
 THE FUNCTIONAL FORM

• X, the dependent variable, is measured as a value share in GDP in every

case where it is appropriate. Expressing the dependent variables as
shares provides estimates of structural change as this term is
commonly understood. When production increases, for example, value
added in all sectors usually expands too, but it is the relative rates of
expansion which determine the changes in the structure of production.
 THE FUNCTIONAL FORM
• In a semilog equation, income and size elasticities are no longer
constant for all values of income and size (as they are in double-log
equations). When the quadratic log terms are included, the growth
and size elasticities of any variable X are given by:

• where ,31, 12 , zyi, and 72 are the estimated coefficients of the

regression given above, and X is the predicted value corresponding to
the level of income or size at which the elasticity is being computed.
 NONLINEARITIES AND
MULTICOLLINEARIT
• Theoretical considerations and empirical results have suggested the
existence of nonlinearities in the relationships analyzed, even after
the usual first step of transforming all or part of the data into
logarithms. On the theoretical level, for example, growth elasticities
for the shares of any aggregate cannot continue indefinitely to exceed
or fall short of one, since the share has an upper level of 100 percent
and is bounded from below by zero.
• These nonlinearities can be taken into account either by retaining a
linear formulation for subsets of data ranked by increasing values of
per capita income and population or by fitting nonlinear functional
forms.
 NONLINEARITIES AND
MULTICOLLINEARIT
• he log quadratic formulation is one way to take nonlinearities into
account, and it has proven particularly useful in this case to represent
the transitional range. However, extrapolations of the parabolic
equations to either extreme of the income or size scales are subject
to large margins of error. For this reason, in the figures of predicted
values in Chapter 2 the estimated equations were not used to predict
below an income level of $100 and above a $1000 level but were
replaced by the actual observed averages of countries in these ranges.
 REAL INCOME, RELATIVE PRICES,
AND EXCHANGE RATE CONVERSIONS
• Every comparative study based on international cross-section data has
to face the problem of how to make commensurable the value figures
expressed in the various local currencies. The usual practice is to
convert all domestic values into a common currency (U.S. dollars as a
rule) through official exchange rates. The resulting international
spread in per capita incomes undoubtedly exaggerates the true
differences in real income. In our sample, for example, income per
capita in the group of countries with lowest income (less than $100)
represented in 1965 no more than 3 to 4 percent of per capita income
in the richest nations (over $2000).
2 TYPES OF DIFFICULTIES IN THE
INCOME COMPARISON

The Relatively Poor

Statistical Coverage In Relative Price Effect
Low-Income
 REAL INCOME, RELATIVE PRICES,
AND EXCHANGE RATE CONVERSIONS
• In addition to the problems of collecting the basic data needed to
estimate national product and income, the researcher has to confront
the existence of a substantial nonmonetized sector in the economies
of less developed countries (LDCs). A comparatively large share of
economic activity in the poorer countries does not cross the market
and has to be estimated to construct the national accounts. This
estimation is not only subject to a wide margin for error but also often
underestimates the extent of the nonmarket activities.
 REAL INCOME, RELATIVE PRICES,
AND EXCHANGE RATE CONVERSIONS
• The second problem related to exchange rate conversions has two
distinct aspects. First, official exchange rates are not equivalent to
equilibrium exchange rates. The heavy reliance of LDCs-particularly
since the Second World War-on high tariffs, import quotas, export
subsidies, and other trade interferences as substitutes for open
devaluations, and the selective application of these instruments
among different industries, gave rise to a price structure with little or
no resemblance to relative international prices.