Today I met up with Gary to continue work on the construction of the data set. However we were still slightly confused as to how some of the items were calculated. Fortunately Dr. Poon was in his office when we were working in the near by lab and we were able to clarify this. Our major concern was that our reconstruction of the data set was not matching up exactly to the numbers that Dr.Poon had calculated for each variable that is:

- Productive Capital Stock
- Labour Hours
- Value Added

Dr. Poon reassured that the methods we were using were CORRECT. The differences in the numbers was due how the ABS calculates Chain Volume Measures (CVM). CVM were used for each of the variables collected. CVM are defined as an index number which allows the base year to be updated more regularly and thus the statistics will be more accurate. As the CVM’s that Dr.Poon used in his calculation for productive capital stock, labour hours and value added were different to the CVM’s calculate for these variables we were going to get different results for our calculations. As a result our data collection and construction task is greatly simplified.

The only difficult item that remains is to find out if there have been any changes in the deflators used as Dr. Poon would like us to use Current Prices as opposed to CVM. Nik will be contacting the ABS shortly to enquire if any changes have been made. We may also need to contact the ABS late on if we are going to determine Value-Add for the private and public sector. This is because the ABS reports the data as combined amount of both sectors. However, Dr. Poon informed me that this is not of high importance at present and just to ensure that we have the data set constructed for the two sectors combined.

Implementation and construction of the Allen Partial Elasticity of Substitution (AES)

In addition to gaining clarity on the finer details of the data set construction I was also able to clarify a few questions which I had about calculating AES. The first item which was clarified was the items of the border Hessian matrix. All I need to do is calculated the partial first order and second order derivatives and obtain a numerical for each element using the results obtained from the pooled regression and industry averages of the variables. Dr.Poon has instructed me to use the program Maxima ,which will greatly simplify the calculation of these derivatives. More information about maxima can be found at: http://maxima.sourceforge.net/. I will now spend some time in becoming more familiar with Maxima to calculate these derivatives.

I was also able to clarify the calculation of the standard error of the AES which will be used to see if it statistically significant. Previously I thought that I will need to calculate the standard error for each AES for each industry. However Dr.Poon informed me that I will just need to find the standard error for the each AES across ALL industries. This once again simplifies my task. I will shortly be posting up details of my results for the various AES’ that I will calculate.

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