Market Potential Estimation Methodology
Overview
This study covers the world outlook for manufacturing plastics products excluding film, sheet, bags, profile shapes, pipes, pipe fittings, laminates, foam products, bottles, plumbing fixtures, and resilient floor coverings 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 plastics products excluding film, sheet, bags, profile shapes, pipes, pipe fittings, laminates, foam products, bottles, plumbing fixtures, and resilient floor coverings. 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 plastics products excluding film, sheet, bags, profile shapes, pipes, pipe fittings, laminates, foam products, bottles, plumbing fixtures, and resilient floor coverings 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 plastics products excluding film, sheet, bags, profile shapes, pipes, pipe fittings, laminates, foam products, bottles, plumbing fixtures, and resilient floor coverings 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 plastics products excluding film, sheet, bags, profile shapes, pipes, pipe fittings, laminates, foam products, bottles, plumbing fixtures, and resilient floor coverings 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 plastics products excluding film, sheet, bags, profile shapes, pipes, pipe fittings, laminates, foam products, bottles, plumbing fixtures, and resilient floor coverings 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 plastics products excluding film, sheet, bags, profile shapes, pipes, pipe fittings, laminates, foam products, bottles, plumbing fixtures, and resilient floor coverings. 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 plastics products excluding film, sheet, bags, profile shapes, pipes, pipe fittings, laminates, foam products, bottles, plumbing fixtures, and resilient floor coverings. 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 plastics products excluding film, sheet, bags, profile shapes, pipes, pipe fittings, laminates, foam products, bottles, plumbing fixtures, and resilient floor coverings.
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 plastics products excluding film, sheet, bags, profile shapes, pipes, pipe fittings, laminates, foam products, bottles, plumbing fixtures, and resilient floor coverings” 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 plastics products excluding film, sheet, bags, profile shapes, pipes, pipe fittings, laminates, foam products, bottles, plumbing fixtures, and resilient floor coverings 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 plastics products excluding film, sheet, bags, profile shapes, pipes, pipe fittings, laminates, foam products, bottles, plumbing fixtures, and resilient floor coverings” as defined by the North American Industrial Classification system or NAICS (pronounced “nakes”). For a complete definition of manufacturing plastics products excluding film, sheet, bags, profile shapes, pipes, pipe fittings, laminates, foam products, bottles, plumbing fixtures, and resilient floor coverings, please refer to the Web site at http://www.icongrouponline.com/codes/NAICS.html. The NAICS code for manufacturing plastics products excluding film, sheet, bags, profile shapes, pipes, pipe fittings, laminates, foam products, bottles, plumbing fixtures, and resilient floor coverings is 326199. It is for this definition of manufacturing plastics products excluding film, sheet, bags, profile shapes, pipes, pipe fittings, laminates, foam products, bottles, plumbing fixtures, and resilient floor coverings that the aggregate latent demand estimates are derived. “Manufacturing plastics products excluding film, sheet, bags, profile shapes, pipes, pipe fittings, laminates, foam products, bottles, plumbing fixtures, and resilient floor coverings” is specifically defined as follows:
326199
This U.S. industry comprises establishments primarily engaged in manufacturing plastics products (except film, sheet, bags, profile shapes, pipes, pipe fittings, laminates, foam products, bottles, plumbing fixtures, and resilient floor coverings).
3261991
Transportation plastics products (except foam & reinforced plastics)
32619911
Transportation fabricated plastics products (excluding foam and reinforced plastics)
3261991111
Fabricated plastics components, housings, accessories, and parts for motor vehicles (excluding foam and reinforced plastics)
3261991121
Fabricated plastics components, housings, accessories, and parts for aircraft, space equipment and missiles (excluding foam and reinforced plastics)
3261991131
Other fabricated plastics components, housings, accessories, and parts for other transportation equipment (excluding foam and reinforced plastics)
3261992
Electrical & electronic fabricated plastics products (excl foam & reinforced)
32619921
Electrical and electronic fabricated plastics (excluding foam and reinforced plastics)
3261992111
Electrical and electronic fabricated plastics products for office, computing and accounting machines, cash registers, and data processing machines (excluding foam and reinforced plastics)
3261992121
Electrical and electronic fabricated plastics products for household and commercial appliances (excluding foam and reinforced plastics)
3261992131
Electrical and electronic fabricated plastics products for communications equipment (excluding foam and reinforced plastics)
3261992191
Other electrical and electronic fabricated plastics products, including wiring devices and parts (excluding foam and reinforced plastics)
3261993
Industrial machinery non-foam plastics products (incl gears, bearings, bushings)
32619931
Industrial machinery plastics products, excluding foam (including gears, bearings, bushings, cams, and other components)
3261993100
Industrial machinery plastics products, excluding foam (including gears, bearings, bushings, cams, and other components)
3261994
Plastics packaging (except film and sheet, foam, and bottles)
32619941
Plastics packaging (excluding film and sheet, foam, and bottles)
3261994111
Plastics pails and drums, more than 3 gallons
3261994115
Plastics tubs (for food products)
3261994121
Plastics jars (for toilet goods, cosmetics, and food products)
3261994125
Plastics blister and bubble formed packaging
3261994131
Plastics shipping boxes and cases
3261994135
Plastics food trays (baskets, shipping boxes, and cases) (excluding foam)
3261994141
Plastics pallets
3261994145
Plastics closures, nonpressure, child_resistant, for prescription products
3261994151
All other plastics closures, nonpressure, including nonprescription
3261994155
Plastics closures, nonpressure and nonchild_resistant, including dispensing and nondispensing
3261994161
Plastics closures for glass, metal, or plastics pressure containers
3261994191
Other plastics packaging
3261995
Plastics dinnerware, kitchenware, & microwavable ware (except foam & cups)
32619951
Plastics dinnerware, tableware, kitchenware, and oven_microwave ware (excluding foam and cups)
3261995111
Plastics dinnerware and tableware
3261995121
Plastics kitchenware
3261995131
Plastics oven/microwave ware (for use in conventional and microwave ovens)
3261996
Consumer, institutional, & commercial plastics products (except foam), nec
32619961
Consumer, institutional, and commercial fabricated plastics products (except foam and wire coated), nec
3261996111
Plastics cups (except foam, including vending machines, over~the~counter, carryout, etc.)
3261996115
Plastics sinkware (flatware or dish drainers, drainer trays and mats, sink mats, sink strainers, dustpans, soapdishes, etc.) (except foam and wire coated)
3261996121
Plastics bathware (shower and bath caddies, shower and bathmats, tissue holders, toothbrush holders, toilet bowl brushes, etc.) (except foam and wire coated)
3261996125
Plastics utility containers (including buckets, pails, laundry baskets, vegetable bins, dishpans, etc.) (except foam)
3261996131
Plastics organizers and holders for closets, drawers, and shelves including paper towel holders, dust mop and broom holders, etc. (except foam and wire coated)
3261996135
Plastics wastebaskets (except foam)
3261996141
Plastics garbage and trash containers (excluding trash bags) (except foam)
3261996145
Plastics grower flowerpots and accessories (except foam and wire coated)
3261996151
Plastics decorative flowerpots, flower boxes, planters, and accessories (except foam and wire coated)
3261996155
Plastics picnic jugs, cooler chests, and ice buckets (except foam)
3261996161
Plastics hardware (including clamps, handles, hinges, locks, casters, knobs, nails, etc.) (except foam and wire coated)
3261996165
Plastics hospitalware (including pitchers, wash basins, trays, bedpans, etc.) (except foam and wire coated)
3261996171
Plastics laboratory ware (including petri dishes, flasks, funnels, etc.) (except foam and wire coated)
3261996175
Plastics individual packing boxes and cases for consumer products (except foam)
3261996181
Plastics sponges and scrubbing pads (except foam)
3261996185
Other consumer, institutional, and commercial plastics products (except foam and wire coated)
3261996187
Gloves and mittens, all plastic, medical and surgical
3261996189
Gloves and mittens, all plastic, all other
3261997
Plastics furniture components & furnishings (except foam & reinforced plastics)
32619971
Plastics furniture components and furnishings (excluding foam and reinforced plastics)
3261997111
Plastics furniture components, accessories, and parts (except foam and reinforced plastics)
3261997121
Other plastics furniture components and furnishings (including fixtures, mirror and picture frames, etc.) (except foam and reinforced plastics)
3261998
Building & construction plastics products (except foam or reinforced plastics)
32619981
Building and construction fabricated plastics products (excluding foam, plumbing fixtures, hardware, or reinforced plastics)
3261998111
Plastics corrugated and flat panels (excluding foam and reinforced plastics)
3261998131
Plastics doors, partitions, moldings, windows and frames, and decorative trim (excluding foam, hardware, and reinforced plastics)
3261998141
Plastics siding and accessories (including soffit, fascia, and skirts) (excluding foam and reinforced plastics)
3261998152
Building and construction plastics fittings and unions, other than pipe (excluding foam, plumbing fixtures, hardware, and reinforced plastics)
3261998171
Plastics wall and counter coverings, including wall and ceiling tile (excluding foam and reinforced plastics)
3261998181
Plastics swimming pool liners and covers (excluding foam and reinforced plastics)
3261998191
Other building and construction plastics products (excluding foam and reinforced plastics)
3261999
Plastics shoe products, including taps, soling slabs, and quarterlings
32619991
Plastics shoe products, including taps, soling slabs, and quarterlinings
3261999100
Plastics shoe products, including taps, soling slabs, and quarterlinings
326199A
Reinforced and fiberglass plastics products, nec
326199A1
Reinforced and fiberglass plastics products
326199A111
Transportation reinforced and fiberglass plastics products
326199A121
Electrical and electronic reinforced and fiberglass plastics products
326199A131
Building and construction reinforced and fiberglass plastics products
326199A141
Other fabricated fiberglass and reinforced products (excluding furniture)
326199B
CONSUMER, INSTITUTIONAL, AND COMMERCIAL FABRICATED PLASTICS PRODUCTS (EXCLUDING FOAM AND WIRE COATED)
326199B1
Plastics furniture components and furnishings (excluding foam and reinforced plastics)
326199B111
Plastics cups (vending machines, over_the_counter, carryout, etc.) (excluding foam)
326199B115
Plastics sinkware (flatware, dish drainers, drainer trays and mats, sink mats, sink strainers, dustpans, soapdishes, etc.) (excluding foam and wire coated)
326199B121
Plastics bathware (shower and bath caddies, shower and bathmats, tissue holders, toothbrush holders, toilet bowl brushes, etc.) (excluding foam and wire coated)
326199B125
Plastics utility containers (buckets, pails, laundry baskets, vegetable bins, dishpans, etc.) (excluding foam)
326199B131
Plastics organizers and holders for closets, drawers, and shelves (paper towel holders, dust mop and broom holders, etc.) (excluding foam and wire coated)
326199B135
Plastics wastebaskets (excluding foam)
326199B141
Plastics garbage and trash containers (excluding trash bags) (excluding foam)
326199B145
Plastics grower flowerpots and accessories (excluding foam and wire coated)
326199B151
Plastics decorative flowerpots, flower boxes, planters, and accessories (excluding foam and wire coated)
326199B155
Plastics picnic jugs, cooler chests, and ice buckets (excluding foam)
326199B161
Plastics hardware (clamps, handles, hinges, locks, casters, knobs, nails, etc.) (excluding foam and wire coated)
326199B165
Plastics hospitalware (pitchers, wash basins, trays, bedpans, etc.) (excluding foam and wire coated)
326199B171
Plastics laboratory ware (petri dishes, flasks, funnels, etc.) (excluding foam and wire coated)
326199B175
Plastics individual packing boxes and cases for consumer products (excluding foam)
326199B181
Plastics sponges and scrubbing pads (excluding foam)
326199B185
Other consumer, institutional, and commercial plastics products (excluding foam and wire coated)
326199B186
Plastics lamp shades
326199M
Miscellaneous receipts
326199P
Primary products
326199S
Secondary products
326199SM
Secondary products and miscellaneous receipts
Furthermore, the definition of NAICS code 326199 includes the following:
Awnings, rigid plastics or fiberglass, manufacturing
Badges, plastics, manufacturing
Balloons, plastics, manufacturing
Bathroom and toilet accessories, plastics, manufacturing
Boats, inflatable plastics, manufacturing
Bolts, nuts, and rivets, plastics, manufacturing
Bottle caps and lids, plastics, manufacturing
Bowls and bowl covers, plastics, manufacturing
Bubble packaging materials, plastics, manufacturing
Building materials (e.g., fascia, panels, siding, soffit), plastics, manufacturin
Building panels, corrugated and flat, plastics, manufacturing
Bushings, plastics, manufacturing
Cigar and cigarette holders, plastics, manufacturing
Clothes hangers, plastics, manufacturing
Clothespins, plastics, manufacturing
Combs, plastics, manufacturing
Coolers or ice chests, plastics (except foam), manufacturing
Countertops, plastics, manufacturing
Credit and identification card stock, plastics, manufacturing
Cultured marble products (except plumbing fixtures) manufacturing
Cultured stone products (except plumbing fixtures) manufacturing
Cups, plastics (except foam), manufacturing
Dinnerware, plastics (except polystyrene foam), manufacturing
Doormats, plastics, manufacturing
Doors and door frames, plastics, manufacturing
Drums, plastics (i.e., containers), manufacturing
Footwear parts (e.g., heels, soles), plastics, manufacturing
Fruits and vegetables, artificial, plastics, manufacturing
Gloves, plastics, manufacturing
Gutters and down spouts, plastics, manufacturing
Hampers, laundry, plastics, manufacturing
Handles (e.g., brush, tool, umbrella), plastics, manufacturing
Hardware, plastics, manufacturing
Ice buckets, plastics (except foam), manufacturing
Ice chests or coolers, plastics (except plastics foam) manufacturing
Jars, plastics, manufacturing
Kitchen utensils, plastics, manufacturing
Ladders, fiberglass, manufacturing
Lamp shades, plastics, manufacturing
Lens blanks, plastics ophthalmic or optical, manufacturing
Life rafts, inflatable plastics, manufacturing
Mattresses, air, plastics, manufacturing
Microwaveware, plastics, manufacturing
Motor vehicle moldings and extrusions, plastics, manufacturing
Netting, plastics, manufacturing
Nozzles, aerosol spray, plastics, manufacturing
Organizers for closets, drawers, and shelves, plastics, manufacturing
Packaging, plastics (e.g., blister, bubble), manufacturing
Pails, plastics, manufacturing
Paint sticks, plastics, manufacturing
Picnic jugs, plastics (except foam), manufacturing
Radio housings, plastics, manufacturing
Reels, plastics, manufacturing
Reflectors, plastics, manufacturing
Rulers, plastics, manufacturing
Screening, window, plastics, manufacturing
Septic tanks, plastics or fiberglass, manufacturing
Shoe parts (e.g., heels, soles), plastics, manufacturing
Shutters, plastics, manufacturing
Siding, plastics, manufacturing
Sponges, plastics, manufacturing
Swimming pool covers and liners, plastics, manufacturing
Swimming pools, fiberglass, manufacturing
Tanks, storage, plastics or fiberglass, manufacturing
Television housings, plastics, manufacturing
Tires, plastics, manufacturing
Trash containers, plastics, manufacturing
Tumblers, plastics, manufacturing
Utility containers (e.g., baskets, bins, boxes, buckets, dishpans, pails), plasti
Watch crystals, plastics, manufacturing
Watering cans, plastics, manufacturing
Windows and window frames, plastics, manufacturing
Windshields, plastics, manufacturing.
Step 2. Filtering and Smoothing
Based on the aggregate view of manufacturing plastics products excluding film, sheet, bags, profile shapes, pipes, pipe fittings, laminates, foam products, bottles, plumbing fixtures, and resilient floor coverings 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 city as well). Another way of looking at this is to say that latent demand for manufacturing plastics products excluding film, sheet, bags, profile shapes, pipes, pipe fittings, laminates, foam products, bottles, plumbing fixtures, and resilient floor coverings is more likely to be similar across cities that have similar characteristics in terms of economic development (i.e., African cities will have similar latent demand structures control
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