. Construct a five-equation econometric model of the state of Indula. There will be a consumption equation, an investment equation, a tax receipt equation, an equation representing the GDP identity, and a national income equation.
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Stowe Automotive is considering an offer from Indula to build a plant making automotive parts for use in that
country. In preparation for a final decision, Stowe’s economics 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,
Corporate profits (P t-1 ) for all firms in Indula were about $100 billion.
consumption C, investment I, and government spending G. It is anticipated that Indula’s federal, state, and local
government will spend in the range of $200 billion next year. On the basis of an analysis of recent economic activity in
Indula, consumption expenditures are assumed to be $100 billion plus 80 percent of national income. National income
is equal to GDP minus taxes T. Taxes are estimated to be a rate of about 30 percent of GDP. Finally, corporate
investments have historically equaled $30 billion plus 90 percent of last year’s corporate profits (P t-1 ).
A. Construct a five-equation econometric model of the state of Indula. There will be a consumption equation, an
investment equation, a tax receipt equation, an equation representing the GDP identity, and a national income
equation.
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