On the Use of Laspeyres and Paasche Indices in a Neoclassical Import Model

In the , 'Norwegian planning models developed by the Central Bureau of Statistics the bulk of imports is determined by means of an import share matrix of constant coefficients with exogenous adjustments. Recent work has attempted to endogenize these coefficient changes by making them functions of the relative price of imports. The introduction of such an explicit functional form, describing the substitution possibilities between the imported and the domestic input, raises the question of whether one should continue to insist on the fact that the volume share of imported and domestic input should add to one, and what the consequences of such a normalization would be. The paper attempts to answer these questions first at the level of the input to a single sector, and then in the context of a multi-sectoral model as a whole