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The 2009 Report on Manufacturing Metal Industrial Valves: World Market Segmentation by City
ICON Group International, May 2009, Pages: 337
Market Potential Estimation Methodology
Overview
This study covers the world outlook for manufacturing metal industrial valves across more than 2000 cities. For the year reported, estimates are given for the latent demand, or potential industry earnings (P.I.E.), for the city in question (in millions of U.S. dollars), the percent share the city is of the region and of the globe. These comparative benchmarks allow the reader to quickly gauge a city vis-à-vis others. Using econometric models which project fundamental economic dynamics within each country and across countries, latent demand estimates are created. This report does not discuss the specific players in the market serving the latent demand, nor specific details at the product level. The study also does not consider short-term cyclicalities that might affect realized sales. The study, therefore, is strategic in nature, taking an aggregate and long-run view, irrespective of the players or products involved.
This study does not report actual sales data (which are simply unavailable, in a comparable or consistent manner in virtually all of the cities of the world). This study gives, however, my estimates for the worldwide latent demand, or the P.I.E. for manufacturing metal industrial valves. It also shows how the P.I.E. is divided across the world’s cities. In order to make these estimates, a multi-stage methodology was employed that is often taught in courses on international strategic planning at graduate schools of business.
What is Latent Demand and the P.I.E.?
The concept of latent demand is rather subtle. The term latent typically refers to something that is dormant, not observable, or not yet realized. Demand is the notion of an economic quantity that a target population or market requires under different assumptions of price, quality, and distribution, among other factors. Latent demand, therefore, is commonly defined by economists as the industry earnings of a market when that market becomes accessible and attractive to serve by competing firms. It is a measure, therefore, of potential industry earnings (P.I.E.) or total revenues (not profit) if a market is served in an efficient manner. It is typically expressed as the total revenues potentially extracted by firms. The “market” is defined at a given level in the value chain. There can be latent demand at the retail level, at the wholesale level, the manufacturing level, and the raw materials level (the P.I.E. of higher levels of the value chain being always smaller than the P.I.E. of levels at lower levels of the same value chain, assuming all levels maintain minimum profitability).
The latent demand for manufacturing metal industrial valves is not actual or historic sales. Nor is latent demand future sales. In fact, latent demand can be lower either lower or higher than actual sales if a market is inefficient (i.e., not representative of relatively competitive levels). Inefficiencies arise from a number of factors, including the lack of international openness, cultural barriers to consumption, regulations, and cartel-like behavior on the part of firms. In general, however, latent demand is typically larger than actual sales in a city market.
Another reason why sales do not equate to latent demand is exchange rates. In this report, all figures assume the long-run efficiency of currency markets. Figures, therefore, equate values based on purchasing power parities across countries. Short-run distortions in the value of the dollar, therefore, do not figure into the estimates. Purchasing power parity estimates of country income were collected from official sources, and extrapolated using standard econometric models. The report uses the dollar as the currency of comparison, but not as a measure of transaction volume. The units used in this report are: US $ mln.
For reasons discussed later, this report does not consider the notion of “unit quantities”, only total latent revenues (i.e., a calculation of price times quantity is never made, though one is implied). The units used in this report are U.S. dollars not adjusted for inflation (i.e., the figures incorporate inflationary trends) and not adjusted for future dynamics in exchange rates (i.e., the figures reflect average exchange rates over recent history). If inflation rates or exchange rates vary in a substantial way compared to recent experience, actually sales can also exceed latent demand (when expressed in U.S. dollars, not adjusted for inflation). On the other hand, latent demand can be typically higher than actual sales as there are often distribution inefficiencies that reduce actual sales below the level of latent demand.
As mentioned earlier, this study is strategic in nature, taking an aggregate and long-run view, irrespective of the players or products involved. If fact, all the current products or services on the market can cease to exist in their present form (i.e., at a brand-, R&D specification, or corporate-image level) and all the players can be replaced by other firms (i.e., via exits, entries, mergers, bankruptcies, etc.), and there will still be an international latent demand for manufacturing metal industrial valves at the aggregate level. Product and service offering details, and the actual identity of the players involved, while important for certain issues, are relatively unimportant for estimates of latent demand.
The Methodology
In order to estimate the latent demand for manufacturing metal industrial valves on a city-by-city basis, I used a multi-stage approach. Before applying the approach, one needs a basic theory from which such estimates are created. In this case, I heavily rely on the use of certain basic economic assumptions. In particular, there is an assumption governing the shape and type of aggregate latent demand functions. Latent demand functions relate the income of a country, city, state, household, or individual to realized consumption. Latent demand (often realized as consumption when an industry is efficient), at any level of the value chain, takes place if an equilibrium in realized. For firms to serve a market, they must perceive a latent demand and be able to serve that demand at a minimal return. The single most important variable determining consumption, assuming latent demand exists, is income (or other financial resources at higher levels of the value chain). Other factors that can pivot or shape demand curves include external or exogenous shocks (i.e., business cycles), and or changes in utility for the product in question.
Ignoring, for the moment, exogenous shocks and variations in utility across countries, the aggregate relation between income and consumption has been a central theme in economics. The figure below concisely summarizes one aspect of problem. In the 1930s, John Meynard Keynes conjectured that as incomes rise, the average propensity to consume would fall. The average propensity to consume is the level of consumption divided by the level of income, or the slope of the line from the origin to the consumption function. He estimated this relationship empirically and found it to be true in the short-run (mostly based on cross-sectional data). The higher the income, the lower the average propensity to consume. This type of consumption function is labeled 'A' in the figure below (note the rather flat slope of the curve). In the 1940s, another macroeconomist, Simon Kuznets, estimated long-run consumption functions which indicated that the marginal propensity to consume was rather constant (using time series data across countries). This type of consumption function is show as 'B' in the figure below (note the higher slope and zero-zero intercept). The average propensity to consume is constant.
Is it declining or is it constant? A number of other economists, notably Franco Modigliani and Milton Friedman, in the 1950s (and Irving Fisher earlier), explained why the two functions were different using various assumptions on intertemporal budget constraints, savings, and wealth. The shorter the time horizon, the more consumption can depend on wealth (earned in previous years) and business cycles. In the long-run, however, the propensity to consume is more constant. Similarly, in the long run, households, industries or countries with no income eventually have no consumption (wealth is depleted). While the debate surrounding beliefs about how income and consumption are related and interesting, in this study a very particular school of thought is adopted. In particular, we are considering the latent demand for manufacturing metal industrial valves across some 230 countries. The smallest have fewer than 10,000 inhabitants. I assume that all of these counties fall along a 'long-run' aggregate consumption function. This long-run function applies despite some of these countries having wealth, current income dominates the latent demand for manufacturing metal industrial valves. So, latent demand in the long-run has a zero intercept. However, I allow firms to have different propensities to consume (including being on consumption functions with differing slopes, which can account for differences in industrial organization, and end-user preferences).
Given this overriding philosophy, I will now describe the methodology used to create the latent demand estimates for manufacturing metal industrial valves. Since ICON Group has asked me to apply this methodology to a large number of categories, the rather academic discussion below is general and can be applied to a wide variety of categories, not just manufacturing metal industrial valves.
Step 1. Product Definition and Data Collection
Any study of latent demand across countries requires that some standard be established to define “efficiently served”. Having implemented various alternatives and matched these with market outcomes, I have found that the optimal approach is to assume that certain key countries or cities are more likely to be at or near efficiency than others. These are given greater weight than others in the estimation of latent demand compared to others for which no known data are available. Of the many alternatives, I have found the assumption that the world’s highest aggregate income and highest income-per-capita markets reflect the best standards for “efficiency”. High aggregate income alone is not sufficient (i.e., China has high aggregate income, but low income per capita and can not assumed to be efficient). Aggregate income can be operationalized in a number of ways, including gross domestic product (for industrial categories), or total disposable income (for household categories; population times average income per capita, or number of households times average household income per capita). Brunei, Nauru, Kuwait, and Lichtenstein are examples of countries with high income per capita, but not assumed to be efficient, given low aggregate level of income (or gross domestic product); these countries have, however, high incomes per capita but may not benefit from the efficiencies derived from economies of scale associated with large economies. Only countries with high income per capita and large aggregate income are assumed efficient. This greatly restricts the pool of countries to those in the OECD (Organization for Economic Cooperation and Development), like the United States, or the United Kingdom (which were earlier than other large OECD economies to liberalize their markets).
The selection of countries is further reduced by the fact that not all countries in the OECD report industry revenues at the category level. Countries that typically have ample data at the aggregate level that meet the efficiency criteria include the United States, the United Kingdom and in some cases France and Germany.
Latent demand is therefore estimated using data collected for relatively efficient markets from independent data sources (e.g. Euromonitor, Mintel, Thomson Financial Services, the U.S. Industrial Outlook, the World Resources Institute, the Organization for Economic Cooperation and Development, various agencies from the United Nations, industry trade associations, the International Monetary Fund, and the World Bank). Depending on original data sources used, the definition of “manufacturing metal industrial valves” is established. In the case of this report, the data were reported at the aggregate level, with no further breakdown or definition. In other words, any potential product or service that might be incorporated within manufacturing metal industrial valves falls under this category. Public sources rarely report data at the disaggregated level in order to protect private information from individual firms that might dominate a specific product-market. These sources will therefore aggregate across components of a category and report only the aggregate to the public. While private data are certainly available, this report only relies on public data at the aggregate level without reliance on the summation of various category components. In other words, this report does not aggregate a number of components to arrive at the “whole”. Rather, it starts with the “whole”, and estimates the whole for all cities and the world at large (without needing to know the specific parts that went into the whole in the first place).
Given this caveat, this study covers “manufacturing metal industrial valves” as defined by the North American Industrial Classification system or NAICS (pronounced “nakes”). For a complete definition of manufacturing metal industrial valves, please refer to the Web site at http://www.icongrouponline.com/codes/NAICS.html. The NAICS code for manufacturing metal industrial valves is 332911. It is for this definition of manufacturing metal industrial valves that the aggregate latent demand estimates are derived. “Manufacturing metal industrial valves” is specifically defined as follows:
332911
This U.S. industry comprises establishments primarily engaged in manufacturing industrial valves and valves for water works and municipal water systems.
3329111
Gates, globes, angles, straightway (y-type) checks, stop and check, cross, etc.
33291111
Gates, globes, angles, straightway (Y_type) check, stop and check, cross, 3_ and 4_way, and other industrial valves, except parts
3329111101
Iron body gates, globes, angles, straightway (Y_type) check, stop and check, cross, 3_ and 4_way, and other industrial valves, including ductile or modular, all pressures (excl. IBBM, AWWA, and UL)
3329111103
Cast carbon steel gates, globes, angles, straightway (Y_type) check, stop and check, cross, 3_ and 4_way, and other industrial valves
3329111105
Forged carbon steel gates, globes, angles, straightway (Y_type) check, stop and check, cross, 3_ and 4_way, and other industrial valves
3329111107
Alloy steel and other metal gates, globes, angles, straightway (Y_type) check, stop and check, cross, 3_ and 4_way, and other industrial valves
3329111109
Brass and bronze (125 lb w.s.p. or more) gates, globes, angles, straightway (Y_type) check, stop and check, cross, 3_ and 4_way, and other industrial valves
3329111111
Actuators (power_operated, on_off mounted) for gates, globes, angles, straightway (Y_type) check, stop and check, cross, 3_ and 4_way, and other industrial valves
33291112
Parts for gates, globes, angles, straightway (Y_type) check, stop and check, cross, 3_ and 4_way, and other industrial valves
3329111213
Parts for gates, globes, angles, straightway (Y_type) check, stop and check, cross, 3_ and 4_way, and other industrial valves
3329112
Valves for water works and municipal equipment (ibbw, awwa, and ul)
3329113
Ball valves (all metals, pressures, and types)
33291131
Industrial valves for water works and municipal equipment (IBBW, AWWA, and UL), except parts
3329113101
Industrial IBBM gate line and tapping valves for water works and municipal equipment
3329113103
Industrial UL check valves (all pressures) for water works and municipal equipment
3329113105
All other industrial UL valves (all pressures), including pest indicators, for water works and municipal equipment
3329113107
Tapping sleeves and crosses for industrial valves for water works and municipal equipment (IBBM, AWWA, and UL)
3329113109
Fire hydrants
3329113111
Industrial AWWA check valves (all pressures) for water works and municipal equipment
3329113113
Industrial AWWA butterfly valves (all pressures) for water works and municipal equipment
33291132
Parts for industrial valves for water works and municipal equipment (IBBM, AWWA, and UL)
3329113215
Parts for industrial valves for water works and municipal equipment (IBBM, AWWA, and UL)
3329114
Butterfly valves (all metals, pressures, and types)
3329115
Plug valves (all metals, pressures, and types)
33291151
Industrial ball valves, all metals, pressures, and types, including manual and power_operated, on_off valves, except parts
3329115101
Industrial iron (including ductile) ball valves (all pressures and types), manual and power_operated, on_off valves
3329115103
Industrial brass and bronze ball valves (all pressures and types), including manual and power_operated, on_off valves
3329115105
Industrial carbon steel (cast and fabricated) ball valves (all pressures and types), including manual and power_operated, on_off valves
3329115107
Industrial alloy steel and other metal ball valves (all pressures and types), including manual and power_operated, on_off valves
3329115109
Actuators (power_operated, on_off mounted) for industrial ball valves (all metals, pressures, and types)
33291152
Parts for industrial ball valves (all metals, pressures, and types), including manual and power_operated, on_off valves
3329115211
Parts for industrial ball valves (all metals, pressures, and types), including manual and power_operated, on_off valves
3329116
Industrial valves, n.e.c.
3329117
Nuclear valves (n-stamp only)
33291171
Industrial butterfly valves (all metals, pressures, and types), including manual and power_operated, on_off valves, except parts
3329117101
Industrial iron (including ductile) butterfly valves, except high_pressure types, including elastomer and fluroplastics lined, manual and power_operated, on_ off valves
3329117103
Industrial brass and bronze butterfly valves, except high_pressure types, including elastomer and fluroplastics lined, manual and power_operated, on_ off valves
3329117105
Industrial carbon steel (cast and fabricated) butterfly valves, except high_ pressure types, including elastomer and fluroplastics lined, manual and power_operated, on_off valves
3329117107
Industrial alloy steel and other metal butterfly valves, except high_pressure types, including elastomer and fluroplastics lined, manual and power_ operated, on_off valves
3329117109
Industrial high_pressure iron butterfly valves (shut_off to full ANSI class ratings), manual and power_operated, on_off valves
3329117111
Industrial high_pressure carbon steel (cast and fabricated) butterfly valves (shut_off to full ANSI class ratings), manual and power_operated, on_off valves
3329117113
Industrial high_pressure alloy steel and other metal butterfly valves (shut_off to full ANSI class ratings), manual and power_operated, on_off valves
3329117115
Industrial butterfly valve actuators (power_operated, on_off mounted)
33291172
Parts for industrial butterfly valves (all metals, pressures, and types), including manual and power_operated, on_off valves
3329117217
Parts for industrial butterfly valves (all metals, pressures, and types), including manual and power_operated, on_off valves
3329118
Automatic valves (regulating and control type) and parts (except nuclear)
3329119
Solenoid-operated valves and parts, except nuclear and fluid power transfer
33291191
Industrial plug valves, all metals, pressures, and types, including lubricated, cylindrical eccentric, and sleeve_lined, except parts
3329119101
Industrial iron (including ductile) plug valves (all pressures and types), including lubricated, cylindrical eccentric, and sleeve_lined
3329119103
Industrial carbon steel plug valves (all pressures and types), including lubricated, cylindrical eccentric, and sleeve_lined
3329119105
Industrial alloy steel and other metal plug valves (all pressures and types), including lubricated, cylindrical eccentric, and sleeve_lined
3329119107
Industrial plug valve actuators (power~operated, on~off mounted)
33291192
Parts for industrial plug valves (all metals, pressures, and types), such as lubricated, cylindrical eccentric, and sleeve~lined
3329119209
Parts for industrial plug valves (all metals, pressures, and types), such as lubricated, cylindrical eccentric, and sleeve~lined
33291193
Parts for industrial plug valves (all metals, pressures, and types), including lubricated, cylindrical eccentric, and sleeve_lined
3329119308
Parts for industrial plug valves (all metals, pressures, and types), including lubricated, cylindrical eccentric, and sleeve_lined
332911B
ALL OTHER MISCELLANEOUS INDUSTRIAL VALVES
332911B1
All other miscellaneous industrial valves
332911B101
Industrial valve cocks and stops (all metals, pressures, and types)
332911B103
Industrial diaphragm and pinch valves, including operators (all metals, pressures, and types), except automatic valves
332911B105
Industrial iron and steel pop safety valves and relief valves (more than 15 lb, w.s.p.)
332911B107
Industrial brass and bronze pop safety valves and relief valves (more than 15 lb, w.s.p.)
332911B109
Industrial compressed gas cylinder valves
332911B111
Industrial valve steam traps (more than 15 lb, w.s.p.)
332911B113
Industrial thru conduit pipeline valves
332911B115
Actuators for all other miscellaneous industrial valves, sold separately (power_operated, on_off mounted)
332911B117
Other industrial metal valves, excluding control valves, regulators, and solenoid valves
332911B118
All other miscellaneous industrial valves
332911D
NUCLEAR VALVES (N_STAMP ONLY)
332911D1
Nuclear valves (N_stamp only), except parts
332911D101
Nuclear cast~carbon steel and low alloy gate, globe, and check valves (N~ stamp only)
332911D102
Gate, globe, and check valves
332911D103
Nuclear forged~carbon steel and low alloy gate, globe, and check valves (N~ stamp only)
332911D105
Nuclear corrosion~resistant alloy steel gate, globe, and check valves (N~ stamp only)
332911D107
Nuclear ball valves, butterfly valves, and plug values (on~off, N~stamp only)
332911D108
Valves
332911D109
Nuclear valve actuators (mounted power~operated, on~off) (N~stamp only)
332911D111
Nuclear automated control valves (N~stamp only)
332911D2
Parts for nuclear valves (N_stamp only)
332911D213
Parts for nuclear valves (N_stamp only)
332911F
AUTOMATIC REGULATING AND CONTROL VALVES AND PARTS (EXCEPT NUCLEAR), POWER_OPERATED, DESIGNED FOR MODULATING (THROTTLING) SERVICE
332911F0
Automatic valves (regulating and control type, except nuclear)
332911F001
Automated control, pneumatic actuated, sliding stem, globe body valves
332911F003
Automated control, pneumatic actuated, sliding stem, all other type valves units . S MA334B
332911F005
Automated control, pneumatic actuated, rotary ball valves
332911F007
Automated control, pneumatic actuated, rotary butterfly valves
332911F009
Automated control, pneumatic actuated, all other rotary valves (including eccentric disk)
332911F011
Automated control, all other pneumatic power~operated control valves
332911F013
Parts for automated control, pneumatic actuated valves (sold separately)
332911F015
Automated control, all other actuation, sliding stem, globe body valves
332911F017
Automated control, all other actuation, sliding stem, all other type valves
332911F019
Automated control, all other actuation, rotary ball valves
332911F021
Automated control, all other actuation, rotary butterfly valves
332911F023
Automated control, all other actuation, all other rotary valves (including eccentric disk)
332911F025
Automated control, all other actuation, all other power~operated (except pneumatic) control valves
332911F027
Parts for all other power~operated (except pneumatic) automated control valves
332911F029
Automated control, valve actuators (sold separately)
332911F031
Remote~sensing direct actuated temperature regulator valves
332911F033
Self~contained direct actuated pressure regulator valves (except instrument type and safety relief valves)
332911F035
Pilot (internal and external) actuated pressure regulator valves
332911F037
Self~contained direct acting precision and instrument type pneumatic (air and gas) pressure regulator valves
332911F039
Flow regulator valves for gas, vapors, or liquids
332911F041
Other regulator valves
332911F043
Parts for regulator valves (sold separately)
332911F1
Automatic regulating and control valves and parts (except nuclear), power_ operated, designed for modulating (throttling) service
332911F100
Automatic regulating and control valves and parts (except nuclear), power_ operated, designed for modulating (throttling) service
332911F101
Automated control valves, pneumatic actuated, sliding stem, globe body type
332911F103
Automated control valves, pneumatic actuated, sliding stem, all other types
332911F105
Automated control valves, pneumatic actuated, rotary, ball
332911F107
Automated control valves, pneumatic actuated, rotary, butterfly
332911F109
Automated control valves, pneumatic actuated, rotary, all other (including eccentric disk)
332911F111
Automated control valves, all other pneumatic actuated
332911F113
Parts for automated control valves, pneumatic actuated (sold separately)
332911F115
Automated control valves, all other actuation (including electric and electro_hydraulic), sliding stem, globe body
332911F117
Automated control valves, all other actuation (including electric and electro_hydraulic), sliding stem, all other types
332911F122
Automated control valves, all other actuation (including electric and electro_hydraulic), rotary (including ball, butterfly, and eccentric disk)
332911F125
Automated control valves, all other power_operated (except pneumatic)
332911F127
Parts for automated control valves, all other power_operated (except pneumatic)
332911F129
Valve actuators (sold separately)
332911F131
Remote_sensing direct actuated temperature regulator valves
332911F133
Self_contained direct actuated pressure regulator valves (except instrument type and safety relief valves)
332911F135
Pilot (internal and external) actuated pressure regulator valves
332911F137
Self_contained direct acting precision and instrument type pneumatic (air and gas) pressure regulator valves
332911F139
Flow regulator valves for gas, vapors, or liquids
332911F141
Other regulator valves
332911F143
Parts for regulator valves (sold separately)
332911H
SOLENOID_OPERATED VALVES AND PARTS, EXCEPT NUCLEAR AND FLUID POWER TRANSFER
332911H0
Solenoid~operated valves (except nuclear and fluid power transfer)
332911H001
Solenoid~operated valves (except power transfer valves), commercial~ industrial types, two~way
332911H003
Solenoid~operated valves (except power transfer valves), commercial~ industrial types, three~way
332911H005
Solenoid~operated valves (except power transfer valves), commercial~ industrial types, other
332911H007
Solenoid~operated valves (except power transfer valves), household appliance type
332911H009
Parts, components, and operators for solenoid~operated valves, except nuclear and power transfer valves (sold separately)
332911H1
Solenoid_operated valves and parts, except nuclear and fluid power transfer
332911H100
Solenoid_operated valves and parts, except nuclear and fluid power transfer
332911H101
Solenoid_operated valves (except nuclear and fluid power transfer), commercial/industrial types, two_way
332911H103
Solenoid_operated valves (except nuclear and fluid power transfer), commercial/industrial types, three_way
332911H105
Solenoid_operated valves (except nuclear and fluid power transfer), commercial/industrial types, other
332911H107
Solenoid_operated valves (except nuclear and fluid power transfer), household appliance type
332911H109
Parts, components, and operators for solenoid_operated valves (except nuclear and fluid power transfer) (sold separately)
332911M
Miscellaneous receipts
332911P
Primary products
332911S
Secondary products
332911SM
Secondary products and miscellaneous receipts
Furthermore, the definition of NAICS code 332911 includes the following:
Angle valves, industrial-type, manufacturing
Automatic (i.e., controlling-type, regulating) valves, industrial-type, manufactu
Ball valves, industrial-type, manufacturing
Boiler gauge cocks, industrial-type, manufacturing
Butterfly valves, industrial-type, manufacturing
Check valves, industrial-type, manufacturing
Compressed gas cylinder valves manufacturing
Control valves, industrial-type, manufacturing
Cross valves, industrial-type, manufacturing
Fire hydrant valves manufacturing
Fire hydrants, complete, manufacturing
Gas valves, industrial-type, manufacturing
Gate valves, industrial-type, manufacturing
Globe valves, industrial-type, manufacturing
Nuclear application valves manufacturing
Plug valves, industrial-type, manufacturing
Pressure control valves (except fluid power), industrial-type, manufacturing
Safety (i.e., pop-off) valves, industrial-type, manufacturing
Solenoid valves (except fluid power), industrial-type, manufacturing
Steam traps, industrial-type, manufacturing
Stop valves, industrial-type, manufacturing
Straightway (i.e., Y-type) valves, industrial-type, manufacturing
Thermostatic traps, industrial-type, manufacturing
Valves for nuclear applications manufacturing
Valves for water works and municipal water systems manufacturing
Valves, industrial-type (e.g., check, gate, globe, relief, safety), manufacturing
Waterworks and municipal water system valves manufacturing.
Step 2. Filtering and Smoothing
Based on the aggregate view of manufacturing metal industrial valves as defined above, data were then collected for as many similar countries and cities as possible for that same definition, at the same level of the value chain. This generates a convenience sample from which comparable figures are available. If the series in question do not reflect the same accounting period, then adjustments are made. In order to eliminate short-term effects of business cycles, the series are smoothed using an 2 year moving average weighting scheme (longer weighting schemes do not substantially change the results). If data are available for a country, but these reflect short-run aberrations due to exogenous shocks (such as would be the case of beef sales in a country stricken with foot and mouth disease), these observations were dropped or 'filtered' from the analysis.
Step 3. Filling in Missing Values
In some cases, data are available for countries or cities on a sporadic basis. In other cases, data may be available for only one year. From a Bayesian perspective, these observations should be given greatest weight in estimating missing years. Assuming that other factors are held constant, the missing years are extrapolated using changes and growth in aggregate national income. Based on the overriding philosophy of a long-run consumption function (defined earlier), cities which have missing data for any given year, are estimated based on historical dynamics of aggregate income for that country.
Step 4. Varying Parameter, Non-linear Estimation
Given the data available from the first three steps, the latent demand is estimated using a “varying-parameter cross-sectionally pooled time series model”. Simply stated, the effect of income on latent demand is assumed to be constant across cities unless there is empirical evidence to suggest that this effect varies (i.e., the slope of the income effect is not necessarily same for all countries). This assumption applies across cities along the aggregate consumption function, but also over time (i.e., not all cities are perceived to have the same income growth prospects over time and this effect can vary from city to cit
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