You Have Been Hired to Forecast GDP (Y) for the Caribbean

question 3

Essay

You have been hired to forecast GDP (Y) for the Caribbean island of Tabasco. Tabasco has domestic food (F) and shelter (S) industries, a tourist (T) industry, and an export (X) industry.
All tourists come from the United States, while the exports are split between Mexico and the
United States. Investment is virtually zero, and government expenditures (G) can be considered to be exogenously determined. Imports (I) are a function of GDP. Thus the structural equations for
a simultaneous model of the Tabascan economy would look something like:
Y = F + S + T + X + G - I
F = f_F (Y, ?)
S = f_S (Y, ?)
T = f_T (USGNP, ?)
X = f_X (USGNP, MEXICOGNP, ?)
I =f_I (Y, ?)
G = exogenous
(a) Develop a theory for Tabasco's economy. Then choose which predetermined variables you would like to add to the simultaneous system and specify to which of the five stochastic structural equations (see question marks) you would like to add them. Explain your reasoning.
(b) Comment on the identification properties of each of the five stochastic equations in the system you outlined in your answer to part (a) above.
(c) How should the coefficients of the system be estimated?
(d) What technique would you use to forecast Tabasco's GNP? Why?

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