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ECO404 GDB Fall 2020 Solution / Discussion

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ECO404 GDB Fall 2020 Solution:

Single equation models are often used by firms to forecast demand or sales. But economic relationships are so complex that require multiple equation models. This is particularly the case in forecasting macroeconomic variables such as gross national product or demand or sales of major sectors or industries. Multiple equation models may include only a few equations or hundreds of them. Consider the following three simple equation model of the national economy that can be used to forecast the GNP of the country.

Consumption (C) = a1 + b1GNP + u1 1
Investment (I) = a2+ b2 Profits in previous years + u2 2

Endognos variables are C ,I and GNP because you have control over it whereas Profit and G(Government expenditure is Exogenous coz you dnt have control over it
The discussion, so far, has focused on what is referred to as a structural econometric model.
That is, the econometrician uses a blend of economic theory, mathematics, and information
about the structure of the economy to construct a quantitative economic model. The
econometrician then turns to the observed data—the facts—to estimate the unknown parameter
values and turn the economic model into a structural econometric model. The term “structural”
refers to the fact that the model gets its structure, or specification, from the economic theory that
the econometrician starts with. The idea, for example, that spending on clothing and shoes is
determined by household income comes from the core of economic theory.


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