It Has Been Argued That Canada's Aggregate Output Growth and Unemployment

question 32

Essay

It has been argued that Canada's aggregate output growth and unemployment rates are very sensitive to United States economic fluctuations,while the opposite is not true.
(a)A researcher uses a distributed lag model to estimate dynamic causal effects of U.S.economic activity on Canada.The results (HAC standard errors in parenthesis)for the sample period 1961:I-1995:IV are: t = -1.42 + 0.717 × urust + 0.262 × urust-1 + 0.023 × urust-2 - 0.083 × urust-3
(0.83)(0.457)(0.557)(0.398)(0.405)
- 0.726 × urust-4 + 1.267 × urust-5;R2= 0.672,SER = 1.444
(0.504)(0.385)
where urcan is the Canadian unemployment rate,and urus is the United States unemployment rate.
Calculate the long-run cumulative dynamic multiplier.
(b)What are some of the omitted variables that could cause autocorrelation in the error terms? Are these omitted variables likely to uncorrelated with current and lagged values of the U.S.unemployment rate? Do you think that the U.S.unemployment rate is exogenous in this distributed lag regression?

---

Definitions:

Labor Skills

The abilities and expertise that workers possess, which can affect their productivity, efficiency, and the quality of work produced.

Capital

Financial assets or resources that individuals or businesses use to invest, produce, and create economic value.

Technology

The technological knowledge available in an economy at any given time. The level of technology determines the amount of output we can generate with our limited resources.

Law of Comparative Advantage

The principle that a country should specialize in producing and exporting goods in which it has the lowest opportunity cost compared to others.