Slide Show #12Slide Show #12AGEC 430

Macroeconomics of Agriculture

Spring 2010

Handout #22Handout #22

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

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

Remember this ratio represents the ratio of MVP to MIC.

Remember this ratio represents the ratio of MVP to MIC.

Recall that IT is included in the investment component of GDP.

Recall that IT is included in the investment component of GDP.

This regression takes the form: NIT = b0 + b1(Year).You know from AGEC 317 that an R2 of 0.002 is an extremely poor explanation of net investment expenditures.

This regression takes the form: NIT = b0 + b1(Year).You know from AGEC 317 that an R2 of 0.002 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.

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 expectedMVP to MIC does a much better job of explaining the annual fluctuations in net investment in farm tractors as evidenced by the R2 of 0.730.

The estimation of the second equation incorporating the ratio of the expectedMVP to MIC does a much better job of explaining the annual fluctuations in net investment in farm tractors as evidenced by the R2 of 0.730.

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

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.

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 triangularprobability distribution

Known as a triangularprobability distribution

Probability

$8.93 $9.45 $9.97

How would a manufacturer How would a manufacturer use this projection?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.

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 #2Firm #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.

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 #2Firm #3

Firm #4