A Two-year Forecast of U.S. Real Gross Domestic Product (GDP) based on Net Exports (NX)

 

YE YANG

College of Business

Western Carolina University

 

Abstract

 

U.S. real GDP is forecast to grow to approximately 9.6 trillion chained 1996 dollars in the year 2001.  This forecast is based on net exports using the Keynesian aggregate expenditure model for the years 2000 through 2001; the forecast assumes government spending, investment, and consumption increase at a constant rate over the next two years.  The explanatory variable used in the forecast was two-year lagged net exports and lagged GDP.  Next exports is influenced by the tastes of consumers for domestic versus foreign goods, the relative prices of foreign and domestic goods, exchange rates, international transportation costs, and government policies toward trade. This paper provides an explanation of how these variables affect each country and the real GDP.  (JEL: E17, F17)

 

Part 1. Introduction

 

This paper forecasts U.S. real gross domestic product (GDP) based on net exports for the year 2000 through 2001.  The explanatory variables are real dollars based on the data from Fed in 1993-1999 and are used to explain the U.S exports and the imports by foreign market.  The forecast approach is based on the Keynesian aggregate expenditure model, assuming that as net exports increases, so does real GDP.  The approach uses for GDP, net exports, and lagged GDP from actual data from 1993-1999, as well as using estimates of net exports for the years 2000 to 2001, are annual values.  The Keynesian approach offers simplicity of using and focusing mainly on the effects net exports has on the level of national output.  This forecast also assumes the other variables of the Keynesian aggregate expenditure model, government spending, investment, and consumption; continue to increase at constant rates.

 

Forecasting real GDP is important because it indicates the nation’s output for a given year and it is also the most comprehensive measure of national income and output.  A forecast downturn of a country’s GDP signals a recession.  The recession would affect imports and exports which would affect other countries’ GDP, since each country’s net exports is a function of other nations’ GDP.  The forecast horizon of two years minimizes the possibility of external factors impacting the economy in an unforeseen way.  The chances for inaccuracy in a forecast model increase with a longer forecast horizon, so the two-year period estimate should provide the best blend of accuracy.  This length of time is short enough to avoid greatly overstating or understating future GDP.

 

The rest of this paper is organized as follows: Part 2. presents the data used to forecast GDP based on net exports; Part 3. presents the explanation of the theoretical basis for the approach adopted in forecasting GDP by using lagged net exports and GDP;  Part 4.  presents forecasts for the variables in the years 2000 and 2001; Part 5. evaluates the importance of the forecasts for the economy; and Part 6. discusses conclusions for economic policy.    

 

Part 2. Data

 

The variables for both U.S. real GDP and net exports for the years 1993-1999 were taken from the Federal Reserve Bank of St. Louis Federal Reserve Economic Data (FRED).  The variables are observed quarterly.  The sample period for the data runs from the first quarter of 1993 to the fourth quarter of 1999 to forecast for the years 2000 to 2001.  The variables are measured in billions of chained 1996 dollars at seasonally adjusted annual rates.  The forecast horizon is two years into the future.

 

 

 

Real GDP is the sum of consumption expenditures, investment expenditures, government expenditures, and the total of exports less imports.  This is shown by the aggregate expenditures model where AE = GDP = C + I + G + X.  Since net exports is one of the major components of GDP, it is useful to calculate the effect it can have in determining GDP.  However, net exports is just one of the variables that can be used to forecast GDP.  Any one of the components of the aggregate expenditure model can be used in determining GDP based on Keynesian theory.  Investment, government expenditures, and consumption can be used as a linear function in forecast GDP, assuming the rest of the variables remain constant.  It is important to note that all of the variables can fluctuate somewhat independently.  Fluctuations in GDP result from fluctuations of all the other variables.

 


The graph shows the change of real GDP from year to year, forecast with net exports.  Notice that the real GDP is estimated to increase in the next two years.

 

 

 


Part 3. Economic Theory:

GDP as a Function of Net Exports and Lagged GDP

 

The explanatory variable is lagged 2 years and used to calculate the dependent, or Y variable.  The aggregate expenditure approach model or real GDP is used to explain the effects of imports and exports on GDP:

 

GDP = AE = C + G + I + X

 

Variable C is personal consumption expenditures of households, G is government purchases, I is investment or gross private domestic investment, and X is net exports which equal to exports less imports.  The equation used to forecast real GDP is:

 

Yt = f(Yt-2, NXt-2)

 

This theoretical approach is appropriate to forecast GDP because output is known to be a function of net exports.

 

Estimates of these regressions are presented in part 4, the empirical results.

 

Part 4. Empirical Results for Real GDP

based on Net Exports and Lagged GDP

 

The equation used to forecast GDP for the year 2001 was estimated by the Ordinary Least Squares Regression formula for the years 1993-1999. The input data was lagged net exports and GDP for these years.  The R-squared of the estimate is 0.98727.  This indicates that approximately 98 percents of the variation in net exports is explained by the variation lagged net exports and GDP.  The regression estimate is (t-statistics in parentheses):

 

GDP = Yt = -1484.033(-356.139)NXt-2 + (9026.946)Yt-2

 

Based on the estimates of the equation, real GDP for the fourth quarter of 2001 will be 9.6 trillion chained 1996 dollars based on the variables used to forecast.

 

Table 1 shows the forecast for GDP for the two years period.

 

Table 1

Forecasts of real GDP 2000-2001

(Measured in billions of chained 1996 dollars)

 

Quarter

Forecast

2000.1

9104.552

2000.2

9081.576

2000.3

9149.694

2000.4

9318.828

2001.1

9330.509

2001.2

9323.749

2001.3

9448.404

2001.4

9580.919

 

The results of this forecast are very interesting.  The first part of the projected two years of GDP is the present GDP and represents the current GDP figures.  However, toward the end of the two-year period, it appears that the real GDP is increasing, which mean that the country is doing well in the economy.  The forecast GDP increases near the end of the forecast period as it is shown above. 

 

Part 5.  The Forecast Implications

“Smart People Play Smart”

 

GDP is important to forecast because it indicates the nation’s output for a given year.  GDP increases or decreases are dependent on the components of aggregate expenditure model, such as consumption, investment, government purchases, and net exports.  Based on the forecast, the lagged exports is increasing and so does the lagged GDP that is why the forecast GDP is getting larger or increasing.  Net exports is exports minus imports.  Imports must be subtracted because consumption, investment, and government purchases include expenditures on all goods, foreign and domestic; and the foreign component must be removed so that only spending on domestic production remains. 

 

The forecast of increasing GDP indicates economic activity will grow steadily in the future.  The forecast GDP increases because net exports and the lagged GDP also increases.  When GDP increases, it indicates that the nation exports economy is doing well. 

 

Part 6. Policy Conclusions

 

Real GDP forecasts to be approximately 9.6 trillion dollars in the year 2001.  The value is based on the fourth quarter of 2002 of lagged exports (-356.139 billion dollars) and lagged GDP (9026.946 billion dollars).

 

If the forecast is correct, then a rise in real GDP will affect the nation’s economy by increasing 98 percents of lagged exports and lagged GDP.  The forecast suggests that for now the economy is only going to get better and stronger.  The forecast showing that there are plenty of rooms to grow for all industries including government, in the country, and into foreign markets.  However, the country should also be aware that nothing lasts forever.  The country should also consider taking advantage of this situation by stabilizing itself for the possible downside economy and prepare for any situation in the future. 

 

The country should keep producing and sell more to the foreign market.  This will help an increase of real GDP.  At this point in time, the government and Fed should continue their current policy control in economy.  The government should keep inflation as low as it can; this will help an increase value of the country currency therefore the country can buy more foreign goods by paying less money.  Government can also help to increase real GDP by limited imports, but, at the same time, also encourage the country exporters.  Exports traders should keep in mind the potential for having their prices eventually undercut by cheap imports; and U.S. exporters will certainly face decreasing demand for their products.  Therefore, the government and country exporters should be cautious.

 

Reference

 

Federal Reserve Bank of St. Louis, Federal Reserve Economic Data (FRED), http://www.stls.Frb.org/fred/ February 19, 2000