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A cost function analysis of the Mexican nonelectrical machinery industry

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  • Dale Truett
  • Lila Truett

Abstract

This paper investigates the existence of economies of scale in the Mexican nonelectrical machinery industry as well as the direct and cross price elasticities of demand for its inputs (capital, labour, and intermediate goods) by estimating a translog cost function. There is evidence that the industry exhibits economies of scale but that technological change has not significantly affected cost. Direct demand elasticities for the inputs are negative and less than one, but capital displays a higher price elasticity of demand than does labour or intermediate goods. In general, the input cross price elasticities indicate that they are substitutes. The results suggest that in the early years of the North American Free Trade Agreement, expansion of the industry may increase its competitiveness and generate some employment. The best near-term prospects for growth in the industry appear to be through foreign investment or joint ventures oriented toward both exports and the procurement activities of government and government-related entities in Mexico.

Suggested Citation

  • Dale Truett & Lila Truett, 1998. "A cost function analysis of the Mexican nonelectrical machinery industry," Applied Economics, Taylor & Francis Journals, vol. 30(8), pages 1027-1035.
    • Handle: RePEc:taf:applec:v:30:y:1998:i:8:p:1027-1035
    DOI: 10.1080/000368498325200
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    Cited by:

    1. Fullerton, Thomas M., Jr. & Sawyer, W. Charles & Sprinkle, Richard L., 2010. "Intra-industry trade in Latin America and the Caribbean," MPRA Paper 34854, University Library of Munich, Germany, revised 2011.
    2. Frank Asche & Subal C. Kumbhakar & Ragnar Tveterås, 2007. "Testing cost vs. profit function," Applied Economics Letters, Taylor & Francis Journals, vol. 14(10), pages 715-718.
    3. Klueh, Ulrich H. & Pastor, Gonzalo & Segura, Alonso, 2009. "Policies to improve the local impact from hydrocarbon extraction: Observations on West Africa and possible lessons for Central Asia," Energy Policy, Elsevier, vol. 37(3), pages 1128-1144, March.
    4. Al-Mutairi, Naief & Burney, Nadeem A., 2002. "Factor substitution, and economies of scale and utilisation in Kuwait's crude oil industry," Energy Economics, Elsevier, vol. 24(4), pages 337-354, July.
    5. Salgado Banda Héctor & Bernal Verdugo Lorenzo E., 2007. "Translog Cost Functions: An Application for Mexican Manufacturing," Working Papers 2007-08, Banco de México.

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