TAYLOR BRUMBELOE

College of Business

Western Carolina University

Abstract

U.S. net exports are forecast to decrease each year from 2001 through 2005.The forecast is based on a Keynesian aggregate expenditures model, which assumes fixed interest rates, consumption spending, government spending and real GDP.The explanatory variable used is gross domestic product (GDP).This variable is taken from the Federal Reserve Bank of St. Louis Federal Reserve Economic Data (FRED).The variable is observed quarterly.The sample period for the data will be from the first quarter of 1990 to the fourth quarter of 2000.From 1990.1 through 200.4 real gross domestic product has risen and real net exports have fallen dramatically. (JEL: E12, H50)

Part 1. Introduction

This paper forecasts U.S. net exports (NX) for the years 2001-2005.The explanatory variable is Gross Domestic Product (GDP).The approach is based on the Keynesian aggregate expenditure model using new estimates of real GDP.The Keynesian approach benefits from simplicity of implementation and makes known the role of gross domestic product in driving aggregate economic activity.

The rest of this paper is organized as follows: part 2. presents the data used to forecast net exports; part 3. presents the theoretical basis for the approach adopted in forecasting net exports; part 4. presents forecasts of net exports for 2001-2005; part 5. evaluates the importance of the forecast for the economy; and part 6. discusses conclusions for economic policy.

Part 2. Data

All variables are taken from the Federal Reserve Bank of St. Louis Federal Reserve Economic Data (FRED).The measures of GDP and net exports are FRED variables GDPC96 and NETEXC96, real GDP measure in chained 1996 dollars, seasonally adjusted annual rates (SAAR).The primary source is the U.S. Department of Commerce Bureau of Economic Analysis.These are quarterly variables.The value given for the first month of each quarter (January, April, July, and October) was taken as the value for that quarter.The sample period for the data is from the first quarter of 1990 to the fourth quarter of 2000.The forecast horizon is five years into the future.

Part 3. Forecasting with the Keynesian Aggregate Expenditures Model

This forecasting project assumes that gross domestic product will rise over the next 20 quarters and will have a negativeeffect on U.S. net exports.This is a simple model and is very appropriate for forecasting short-term net exports.The Keynesian net exports function can be written as:

NX=Y+C+I+G

Since real GDP equals real aggregate expenditures (AE) in equilibrium, the AE function can be written as:

Y=AE=C+I+G+NX

The values for projected future net exports is expressed in the following equation:

NX=b₀+b₁ (NX_t-5)-b₂ (GDP_t-5) 1.

Part 4. U.S. Net Exports: A Short-Term Projection 2001-2005

Forecasting equation one was estimated by an ordinary least square regression for the period 1990.1-200.4.The R-squared of the estimate is 0.97222054.The F-statistic for the joint null hypothesis of zero slopes is 367.4771.The estimate of the equation is:

NX=2426.617+0.20932(NX-5)-0.37259(GDP-5)

The regression statistics were very good with R-squared being very close to one.Using this equation it was found that net exports are negatively effected by a rise in U.S. GDP.Over the projected time period, net exports will double but in the wrong direction.

Part 5. Cloudy Forecast for Net Export’s Future

This forecast for real net exports was very unfavorable.According to the forecast, as gross domestic product rises, net exports will fall.This most likely would be caused when the U.S. economy’s prices go up and other countries cannot afford to buy our products.

Part 6. Policy Conclusions

Real net exports are forecasted to decrease over the next five years.If this forecast turns out to be correct, many U.S. businesses will lose money when foreign buyers cannot purchase U.S. products.If the U.S. imports more than it exports, then the U.S. deficit will increase sending taxes up again.Since, U.S. businesses have no effect on the change in prices, they cannot do much until the government regulates.It would be the job of the U.S. government to regulate exporting prices and get the export and import rates back at an equilibrium or at least have more exports than imports.The Fed would also have a part in regulating prices.They would have to work with the U.S. government and figure out a way to regulate market prices so that foreign buyers would be able to purchase more of our products again.

Reference

Federal Reserve Bank of St. Louis, Federal Reserve Economic Data (FRED) (12-31-98), http://www.stls.frb.org/index.html (2-22-01)