Gates Equipment, Inc., manufactures a wide range of parts for the agricultural equipment industry. The company is currently evaluating the merits of building a new plant in order to fulfill a new contract with a large export concern. The alternative to expansion is to use additional overtime, reduce other production, or a combination of both. The company will add new capacity only if the regional economy appears to be expanding. Forecasting the general economic activity of the United States is therefore an important input to the decision making process. The firm has collected data and estimated the following relations for the U. S. economy:
Last year's total profits (all corporations): Pt-1 = $1,400 billion
This year's government expenditures: G = $2,800 billion
Annual consumption expenditures: C = $800 billion + 0.8Y + u
Annual investment expenditures: I = $950 billion + 0.75Pt-1
Annual tax receipts: T = 0.25 GDP
National income Y = GDP - T
Gross domestic product GDP = C + I + G
Forecast each of the above variables through the simultaneous relations expressed in the multiple equation system. Assume that all random disturbances average out to zero.
Given Y = GDP - T ; but T = 0.25 GDP.
Then Y = GDP - 0.25GDP = 0.75GDP
Given I = 950b + 0.75(Pt-1) ; but Pt-1 = 1400b
Then I = 950b + ...
The solution Forecast each of the variables through the simultaneous relations expressed in the multiple equation system for Gates Equipment, Inc.