Energy price shocks, input substitution and developmental implications: A translog model applied to Fiji

Mahendra Reddy and John Yanagida

Journal of the Asia Pacific Economy, 1998, vol. 3, issue 1, 21-34

Abstract: The extensive use of energy inputs in the production process will have serious implications on foreign exchange earnings if energy inputs are solely imported. This has been the case of the Fijian economy. Furthermore, the situation is expected to deteriorate further in periods of energy price fluctuation if the price elasticity of demand for these inputs is inelastic. Using standard neoclassical duality theory, own‐ and cross‐price elasticities of demand and elasticities of substitution among the basic factors of production for the Fijian economy are derived. The inelastic demand of energy inputs implies that in periods of increased energy prices, expenditure on this input will increase leading to a deterioration of the terms of trade. Furthermore, price of export products using large amounts of energy inputs will increase, reducing the competitive edge of Fijian exports in the export market. Elasticity of substitution results indicate a movement towards the use of more energy‐saving capital equipment as a means of reducing dependency on energy inputs.

Date: 1998
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DOI: 10.1080/13547869808724633

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