CHALLENGES FOR FRANCE IN THE EMERGING INTERNATIONAL ENVIRONMENT: A DYNAMIC ANALYSIS

Lila J. Truett and Dale B. Truett

Contemporary Economic Policy, 2009, vol. 27, issue 4, 566-573

Abstract: France faces substantial challenges as the economic integration of Europe and the international economy continues. This article uses a dynamic aggregate translog cost function with inputs of capital, labor, and imports to examine the likely impact of closer world economic ties on France. This technique allows one to estimate short‐ as well as long‐run direct price elasticities of demand for the inputs and cross‐price elasticities for each respective input pair. The findings of the article include that (1) the French economy is becoming more sensitive to changes in import prices and (2) all the inputs are substitutes for one another. These results suggest that continuing international economic integration will present substantial challenges to the French economy. The short‐run estimates of direct and cross‐price elasticities are consistent with the Le Châtelier principle, except for the cross‐price elasticities between capital and labor. Some possible reasons for the latter result are discussed in the article. (JEL F14, O10, O12)

Date: 2009
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