# An Introduction to Applied Econometric Analysis by R. F. Wynn, K. Holden (auth.)

By R. F. Wynn, K. Holden (auth.)

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Extra resources for An Introduction to Applied Econometric Analysis

Sample text

The constraint was therefore imposed as the equality V2 = vV4 and the equation re-estimated to give It - Ki-5) + 0'OOI53(Kc*-s - KC*-6) + 0'OOI90(Kt*-6 - Kt*-7) + 0'OO270(Kc*-7 - Ki-B) = 0'OO305(Ki_ i (0'00077) (0'00070) (0·00076) (0·00080) + 0·02084Kt + 1·20525(1t_l (0'00178) -0·36316(It _ 2 - <5Kt - 1) <5Kt - 2 ). No measure of the goodness offit of this equation is presented, but Jorgenson and Stephenson (p. 216) conclude that the results provide 'a very close fit to historical experience' and that there is no evidence of autocorrelation of residuals.

1 INTRODUCTION In the study of economic behaviour one of the variables which is important at all levels of economic activity is investment: that is, the value of goods bought by the producing sector which will provide services in the future. This chapter is concerned with the factors affecting both the demand for net additions to capital stock and the replacement of capital assets, but ignoring the government sector and investment in housing and inventories. Alternative names for this gross investment are 'private sector non-dwelling gross fixed capital formation' or 'gross private fixed non-residential domestic investment'.

3 DESIRED CAPITAL STOCK Various theories have been suggested to determine the desired level of capital stock and some of these are now considered. The simplest, which is discussed by Chenery (1952), is obtained by assuming that there is an economically most profitable amount of capital required to produce a given level of output, X, so that the desired level of capital stock is K* K* = (3X or - = (3 X where (3 is the most profitable, or desired, capital-output ratio. Since X measures output per unit of time the value of (3 will depend upon the unit time period.