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 (Pt. 1) for all firms in Indula were about $130.00 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 $260 billion next year. On the basis of an analysis of recent economic activity in Indula, consumption expenditures are assumed to be $156.00 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 $39 billion plus 90% of last year's corporate profits (Pt. 1). Construct a five-equation econometric model of the state of Indula. C= I = T= GDP= Y = C I T GDP A Simple Model of the National Economy of Indula Y α₁ + B₁Y+ €₁ ▼ α₂ + B₂ Pt-1 + €2 ▼ B3 x GDP+ €3▼ Assuming that all random disturbances average to zero, solve the system of equations to arrive at next year's forecast values for C, I, T, GDP, and Y. (Hint: It is easiest to start by solving the investment equation and then working through the appropriate substitutions in the other equations.) C+I+G▼ GDP-T Forecast (Billions of dollars)
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 (Pt. 1) for all firms in Indula were about $130.00 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 $260 billion next year. On the basis of an analysis of recent economic activity in Indula, consumption expenditures are assumed to be $156.00 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 $39 billion plus 90% of last year's corporate profits (Pt. 1). Construct a five-equation econometric model of the state of Indula. C= I = T= GDP= Y = C I T GDP A Simple Model of the National Economy of Indula Y α₁ + B₁Y+ €₁ ▼ α₂ + B₂ Pt-1 + €2 ▼ B3 x GDP+ €3▼ Assuming that all random disturbances average to zero, solve the system of equations to arrive at next year's forecast values for C, I, T, GDP, and Y. (Hint: It is easiest to start by solving the investment equation and then working through the appropriate substitutions in the other equations.) C+I+G▼ GDP-T Forecast (Billions of dollars)
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text: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 (Pt - 1) for all firms in Indula were about $130.00 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 $260 billion next year. On the
basis of an analysis of recent economic activity in Indula, consumption expenditures are assumed to be $156.00 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 $39 billion plus 90% of last year's corporate profits (Pt-1).
Construct a five-equation econometric model of the state of Indula.
C =
I =
T=
GDP=
Y =
C
I
T
GDP
A Simple Model of the National Economy of Indula
Y
α₁ + B₁Y+ ε₁
a2 + B₂ Pt-1 + €2
B3 x GDP+€3
C+I+G
Assuming that all random disturbances average to zero, solve the system of equations to arrive at next year's forecast values for C, I, T, GDP, and Y.
(Hint: It is easiest to start by solving the investment equation and then working through the appropriate substitutions in the other equations.)
GDP-T
Forecast
(Billions of dollars)
Expert Solution
Step 1
GDP refers to Gross Domestic Product. The meaning of GDP is the computation of the value of the economic activity within the nation. In easy words, GDP is described as the addition of the final prices of the products and services produced in an economy in a given period.
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