The Houston area regional macroeconometric model



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The Houston Area Regional Econometric Model is an attempt to apply the procedures of regression analysis, mathematical modeling, and economic theory to explain the regional growth process. It is estimated over a sample period of 1960 to 1972, using ordinary least squares and also made a satellite of the Wharton Annual and Industry Model. As is developed in the literature review chapter, several competing theories exist which can be used to explain how regions grow. However, as other modelers have done, the export base theory (modified to take into account relative regional to national production costs) is used to separate the region's industries into exporting (manufacturing) and local (non-manufacturing) groups. Since the region contains one of the largest energy production capacities in the world, the region's energy industries are explicitly analyzed in the model. Several regional economic aggregates are explained in the model. These include: output (value added), the wage rate and employment by industry, non-wage incomes, the unemployment rate, retail sales, the consumer price index, demand deposits, state sales tax payments, local government revenue and expenditures, and energy demands for natural gas and electricity. In addition to the modified Export Base Theory used in the output equations, economic theory is used throughout the model in developing the equations in each block. For example, a derivative of the GES production function under conditions of profit maximization is utilized to estimate the labor demand function. Mean absolute percent errors and Theil U Statistics for sample period forecasts of each endogenous variable are reported. Multiplier exercises are performed to reveal the dynamic properties and interrelationships among model variables. The results indicate that the model's performance compares favorably with that of other regional models, as well as with simpler projection techniques. Four sets of forecasts are presented over the 1973-1980 period. Each is based on a variation of the national outlook, estimated using the Wharton Annual and Industry Model. In each forecast, local economic growth rates exceeded that of the nation over the sample period.