Question: You are asked to develop a model to predict the volume of new orders for steel. The ?rst step is to correlate constant-dollar new orders with the key components of aggregate demand that use steel: motor vehicles, household appliances, producers durable equipment, housing, nonresidential construction, inventories, exports, and imports (with a negative sign).
(a) Estimate this equation. Explain why it is not useful for forecasting.
(b) One of the most surprising results in this equation is that the motor vehicle term is not signi?cant. Try adding industrial production in the motor vehicle industry to this equation. What happens to the sign of the term for consumption of motor vehicles? Does that make sense or not? What about changes in the other signs - are they sensible or not?