4. Exercise 5.4
Please Wait . . .
Stowe Automotive is considering an offer from the country of Indula to build a plant making automotive parts for use there. In preparation for a final decision, Stowe’s economists have been hard at work constructing a basic econometric model for Indula to aid the company in predicting future levels of economic activity. Because of the cyclical nature of the automotive parts industry, forecasts of future economic activity are quite important in Stowe’s decision process.
Corporate profits (P
t – 1
Pt – 1 ) for all firms in Indula were about $110.00 billion. GDP for the nation is composed of consumption, C, investment, I, and government spending, G. It is anticipated that Indula’s federal, state, and local governments will spend in the range of $220 billion next year. On the basis of an analysis of recent economic activity in Indula, consumption expenditures are assumed to be $154.00 billion plus 80% of national income. National income, Y, is equal to GDP minus taxes, T. Taxes are estimated to be at a rate of about 30% of GDP. Finally, corporate investments have historically equaled $33 billion plus 90% of last year’s corporate profits (P
t – 1
Pt – 1 ).
Construct a five-equation econometric model of the state of Indula.
A Simple Model of the National Economy of IndulaC
C = selector 1α