A New Approach to Model GNP Functions: An Application of Non-Separable Two-Stage Technologies

This paper shows that two-stage technologies can provide a general procedure for combining profit and value-added functions to obtain new specifications of import demand and output supply systems. In such technologies, we assume that imports interact with other exogenous variables to produce intermediate inputs, which are in turn used to produce final outputs. To show the utility of this new approach, we use it to specify and estimate the Australian GNP function. As will be seen, our proposed framework has an attractive property: the capability of incorporating exogenous effects such as labour and capital endowments within a strong theoretical underpinning. We investigate a new GNP function for which the demand and supply systems are effectively globally regular. Our results demonstrate that the new approach is feasible and promising while the estimated elasticities are not significantly different from those of the traditional models.