A Cost Function Approach to Investigate the Trade Liberalization Effects on Productivity in Iran: Using Dual Theorem

Document Type : Research Paper

Authors

1 Tehran University, Faculty of Economics

2 Tarbiat Modarres University

Abstract

In this paper, besides of studying and reviewing the theoretical analysis of the trade liberalization and industrial growth, the effect of trade liberalization on productivity in the industrial sector of the Iran`s economy are investigated. In this study, a Translog cost function and SUR model for the period of 1974-2006 are used in order to evaluate the trade liberalization variable. At first, the demand function for industry production factors (labour, capital, energy and raw materials) are estimated with related price, income and substitution elasticities and then, production and cost structure of Iran`s industry have been studied.
After that, the effects of trade liberalization with two aspects of cost and production that is the application of the dual theorem in this paper, is investigated and shows that the one percent increase in the volume of trade through trade liberalization, on the one hand, will increase industrial production by %0.47 (primal effect of productivity), and On the other hand, will decrease the cost of production by %0.26 (the dual effect of productivity). Moreover, Industrial inputs demand functions shows that moving towards a freer trade regime leads to adoption which methods by the firm that save energy and raw materials, and tends to increase the use of labour and capital.
JEL Classification: D24, C22, F41, O47

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History

  • Receive Date: 14 March 2012
  • Revise Date: 17 September 2013
  • Accept Date: 23 April 2013

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