Slide Show #12 AGEC 430 Macroeconomics of Agriculture Spring 2010

Handout #22

Desired capital stock concept discussed in Handout #6 (Slide Show #5).

Remember this ratio represents the ratio of MVP to MIC.

Recall that I T is included in the investment component of GDP.

This regression takes the form: NI T = b 0 + b 1 (Year). You know from AGEC 317 that an R 2 of is an extremely poor explanation of net investment expenditures. This regression takes the form: NI T = b 0 + b 1 (Year). You know from AGEC 317 that an R 2 of is an extremely poor explanation of net investment expenditures.

This is verified by an examination of the linear trend projected by the estimated equation, which is declining very slightly.

The estimation of the second equation incorporating the ratio of the expected MVP to MIC does a much better job of explaining the annual fluctuations in net investment in farm tractors as evidenced by the R 2 of The estimation of the second equation incorporating the ratio of the expected MVP to MIC does a much better job of explaining the annual fluctuations in net investment in farm tractors as evidenced by the R 2 of

This is verified by an examination of the annual fluctuations of net investment in farm tractors projected by the second estimated equation.

Thus net investment in farm tractors was expected to be $9.45 billion, but there is a 70 percent chance that it could be as high as $9.97 billion and as low as $8.93 billion. Known as a triangular probability distribution Known as a triangular probability distribution Probability $8.93 $9.45 $9.97

How would a manufacturer use this projection? Indicates industry demand. Each manufacturer like John Deere would want to maintain its market share. Given its market share, does it have sufficient capacity to meet this demand? If not, does it make economic sense to expand its manufacturing capacity?

Assume total industry sales last year was $9 billion and that total industry sales fare expected to be $9.45 billion this year. Let the red circle represent $9 billion and the blue circle is $9.45 billion. Assume there are four firms supplying farm machinery. Firm #1 had area ABC of the original “pie”. To keep its share of the pie, it must expand supply to ADE. A B C D E Firm #1 Firm #2 Firm #3 Firm #4

The question Firm #1 must ask itself is does it have the manufacturing capacity to meet the sales suggested by area ADE. If not, it must determine whether or not expansion is economically feasible. We will examine a process to address this issue in Handout #24. A B C D E Firm #1 Firm #2 Firm #3 Firm #4