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Sales Forecast Modeling - Gates Equipment, Inc

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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.

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Solution Summary

The solution Forecast each of the variables through the simultaneous relations expressed in the multiple equation system for Gates Equipment, Inc.

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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 + ...

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