i will upload the instructions and all data needed. It is an economic statistics class.
Today I will discuss The Research Project.
The project is about US Trade Deficits. What is Trade Deficit?
In Econ 202, you have learned that, Trade Deficits = Total Imports – Total Exports.
Looking at the graph, we see that both Total Imports and Total Exports are increasing overtime. However, Total Imports are increasing more than Total Exports, which is causing Trade Deficits in the USA.
In this Research Project, we will investigate what factors/macroeconomic variables are causing US Trade Deficits, using the Econometric tools we have learned.
Therefore, the title of your project could be as follows:
US Trade Deficits: An Econometric Analysis
Your research project must have a number of sections, such as:
Your introduction may start with a motivation of why it is important to study the causes of trade deficits in the USA. For your convenience, I have uploaded a number of readings on Taitanium. Those readings should help you to write the motivation part of your introduction. For example, a CRS Report to the US Congress mentions the following about US trade deficits:
‘The cost of the trade deficit is a deterioration of the U.S. investment-income balance, as the payment on what the United States has borrowed from foreigners grows with its rising indebtedness. Borrowing from abroad allows the United States to live better today, but the payback must mean some decrement to the rate of advance of U.S. living standards in the future. U.S. trade deficits do not now substantially raise the risk of economic instability, but they do impose burdens on trade sensitive sectors of the economy.’
Your motivation part should not exceed a page.
After motivation, you may write about what you have done in this research paper. For example, you can say: In this research paper, I developed a log-linear econometric model to understand what macroeconomic variables may cause US trade deficits.
Some key macroeconomics variables that directly and indirectly affect US trade deficits are:
Therefore, in the introduction, you can mention what macroeconomic variables you have chosen as independent variables/regressors in your long-linear regression model. In the introduction, you should also very briefly mention why and how you expect these macroeconomic variables to affect US trade deficits.
Next you need to briefly mention the findings of your research paper in the introduction. For example, you may find that an increase in the US price level deteriorates (increases) the US trade deficits, while an increase in import prices improves (decreases) the US trade deficits. Similarly, you should briefly mention other important findings of your research paper in the introduction.
The last line of your introduction should be the following:
The rest of the research paper is organized as follows: section two reviews literatures of US trade deficits; section three develop a log-linear econometric model to understand the causes of US trade deficits; section four discusses the estimated results of the econometric model; and section five concludes.
In this section, you simply review and summarize what other researchers and policymakers found and said about trade deficits in the USA. I have posted some readings but please feel free to find some more readings yourself.
In this section, you develop log-linear regression model to study the causes of trade deficits in the USA. You may start with a simple model. From our macroeconomic intuition we know that if import price increases then import should decrease and hence trade deficit decrease also. Similarly US job market may also affect US trade deficits.
For example, if US overall job market improves, that is, if the economy creates more jobs, then import should increase and hence trade deficits should increase as well.
Hence we can start with the following log-linear regression model of the US trade deficits.
Y = US monthly trade deficits
X1 = Prices of imported goods
X2 = US employment level
Then you should utilize the concepts you have learned in the section called ‘Specification Bias’. You may argue that the above model may be under-specify because from you knowledge of macroeconomics, you know that a number of other macroeconomic may affect US trade deficits. Therefore, excluding those may cause a misspecification problem in your model.
Other variables that may affect US trade deficits are: US GDP (since monthly data of GDP is not available, so you can use Industrial Production as a proxy for GDP), US consumer price index, savings in the USA, exchange rate, stock price index, government spending, government budget deficit etc.
I suggest that you develop two more models. Please be sure to give reasoning what you think a particular variable is justified as regressor/independent variable in your model. Please read the Open Economy Macroeconomics chapter of ECON 202 text if you want to review your concepts about what variables affect trade deficits of the USA.
In this section you report the estimated results of the three regression model you have developed and interpret them. You also need to justify your results, that is, you need to explain whether the results you found make sense or not.
For example, you can report the estimated results of the first model as follows:
(P-value) (0.00) (0.00) (0.00)
R2 = 91.54%
R2adj = 91.47%
You must interpret the results clearly. The estimated results suggest that the coefficients of both import price and employment are highly significant, that is, the confidence interval is very high (100%here). We also see that due to a 1% increase in the import price index, US trade deficits decrease by 4.09%. This result is consistent with our expectations. (Note: some results may not be consistent with our expectations). On the other hand, if US employment increases by 1%, then US trade deficits increase by 7.82%. This result is also consistent with our expectation as we know that when the economy gets better, the country buys more goods from other countries causing a negative impact on trade balance.
Our estimated by of R2 and R2adj are also high.
Then you need to report and interpret the results of two other models as well. Please explain all the results.
Conclusion is a summary of the paper. Please take one/two important sentence of each of the sections before conclusion to put them in conclusion.
In the conclusion, you may also mention the drawbacks of you research paper.
You may also provide a roadmap on how the quality of your research paper may be improved in the future.
1. Constant, Serge and Yaoxing Yue (2010) ‘An Econometric Estimation of Import Demand Function for Cote D’Ivoire’, International Journal of Business and Management, vol. 5, no. 3, pp 77-84.
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