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The 2011 Report on Non-Ferrous Metal Rolling, Drawing, and Extruding Excluding Aluminum and Copper: World Market Segmentation by City
ICON Group International, Jan 2011, Pages: 348
Market Potential Estimation Methodology
Overview
This study covers the world outlook for non-ferrous metal rolling, drawing, and extruding excluding aluminum and copper 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 non-ferrous metal rolling, drawing, and extruding excluding aluminum and copper. 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 non-ferrous metal rolling, drawing, and extruding excluding aluminum and copper 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 non-ferrous metal rolling, drawing, and extruding excluding aluminum and copper 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 non-ferrous metal rolling, drawing, and extruding excluding aluminum and copper 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 non-ferrous metal rolling, drawing, and extruding excluding aluminum and copper 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 non-ferrous metal rolling, drawing, and extruding excluding aluminum and copper. 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 non-ferrous metal rolling, drawing, and extruding excluding aluminum and copper. 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 non-ferrous metal rolling, drawing, and extruding excluding aluminum and copper.
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 “non-ferrous metal rolling, drawing, and extruding excluding aluminum and copper” 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 non-ferrous metal rolling, drawing, and extruding excluding aluminum and copper 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 “non-ferrous metal rolling, drawing, and extruding excluding aluminum and copper” as defined by the North American Industrial Classification system or NAICS (pronounced “nakes”). non-ferrous metal rolling, drawing, and extruding excluding aluminum and copper The NAICS code for non-ferrous metal rolling, drawing, and extruding excluding aluminum and copper is 331491. It is for this definition of non-ferrous metal rolling, drawing, and extruding excluding aluminum and copper that the aggregate latent demand estimates are derived. “Non-ferrous metal rolling, drawing, and extruding excluding aluminum and copper” is specifically defined as follows:
331491
This U.S. industry comprises establishments primarily engaged in (1) rolling, drawing, or extruding shapes (e.g., bar, plate, sheet, strip, tube) from purchased nonferrous metals) and/or (2) recovering nonferrous metals from scrap and rolling, drawing, and/or extruding shapes (e.g., bar, plate, sheet, strip, tube) in integrated mills.
3314911
Nickel and nickel-base alloy mill shapes, including nickel copper alloys
33149111
Nickel and nickel~base alloy plate, sheet, strip, and wire
3314911101
Nickel and nickel~base alloy plate, sheet, and strip (excluding nickel~copper alloys)
3314911106
Other nickel and nickel~base alloy mill shapes (excluding nickel~copper alloys and wire)
3314911111
Nickel~copper alloy mill shapes and forms (except wire)
3314911116
Nickel and nickel alloy wire, made in rolling mills
3314912
NICKEL AND NICKEL_BASE ALLOY MILL SHAPES
33149121
Nickel and nickel_base alloy plate, sheet, strip, and wire
3314912101
Nickel and nickel_base alloy plate, sheet, and strip, excluding nickel_copper alloys
3314912106
Other nickel and nickel_base alloy mill shapes, excluding nickel_copper alloys and wire
3314912111
Nickel_copper alloy mill shapes and forms (except wire)
3314912118
Nickel and nickel alloy wire, including insulated wire and cable
3314913
Titanium and titanium-base alloy mill shapes, excluding wire
33149131
Titanium and titanium_base alloy mill shapes
3314913101
Titanium and titanium_base alloy ingot
3314913106
Forging and extrusion titanium and titanium_alloy ingot (billet)
3314913111
Other titanium and titanium_base alloy mill shapes (including sheet, plate, tubing, bar, etc.), excluding wire
3314915
BARE NONFERROUS METAL WIRE (EXCEPT ALUMINUM AND COPPER), MADE IN NONFERROUS PLANTS THAT DRAW WIRE
33149151
Bare nonferrous metal wire, except aluminum and copper, made in nonferrous plants that draw wire
3314915100
Bare nonferrous metal wire (except aluminum and copper), made in nonferrous plants that draw wire
3314917
NONFERROUS WIRE CLOTH AND WOVEN WIRE PRODUCTS
33149174
Nonferrous wire cloth and woven wire products
3314917400
Nonferrous wire cloth and woven wire products, made in nonferrous plants that draw wire
3314919
Precious metal mill shapes
33149191
Other precious metal mill shapes, including platinum group metals, including wire
3314919101
Gold mill shapes (excluding wire)
3314919106
Silver mill shapes (excluding wire)
3314919111
Other precious metal mill shapes, including platinum~group metals (excluding wire)
3314919116
Precious metal wire, made in rolling mills
331491A
PRECIOUS METAL MILL SHAPES
331491A1
Other precious metal mill shapes, excluding wire
331491A101
Gold mill shapes, excluding wire
331491A106
Silver mill shapes, excluding wire
331491A111
Other precious metal mill shapes, including platinum_group metals, excluding wire
331491A118
Precious metal wire, including insulated wire and cable
331491C
All other nonferrous metal mill shapes
331491C1
Other nonferrous metal rolled, drawn, and extruded shapes, including zinc (excluding wire)
331491C101
Magnesium and magnesium~base alloy mill shapes (excluding wire)
331491C106
Lead and lead~base alloy plate, sheet, and strip (excluding wire)
331491C111
Other rolled, drawn, or extruded lead and lead~base alloy mill shapes, including pipe, tubing, traps, and bends (excluding wire)
331491C121
Tungsten and tungsten~base alloy mill shapes (excluding wire)
331491C126
Molybdenum and molybdenum~base alloy mill shapes (excluding wire)
331491C131
Other nonferrous metals, rolled, drawn, and extruded shapes, including zinc (excluding wire)
331491C2
Other nonferrous wire (except copper, aluminum, nickel, and precious metals)
331491C216
Other nonferrous wire (except copper, aluminum, nickel, and precious metals), made in rolling mills
331491D
ALL OTHER NONFERROUS METAL MILL SHAPES
331491D1
Other nonferrous metal rolled, drawn, and extruded shapes, excluding wire
331491D106
Lead and lead_base alloy plate, sheet, and strip, excluding wire
331491D111
Other rolled, drawn, and extruded lead and lead_base alloy mill shapes (including pipe, tubing, traps, and bends), excluding wire
331491D121
Tungsten and tungsten_base alloy mill shapes, excluding wire
331491D126
Molybdenum and molybdenum_base alloy mill shapes, excluding wire
331491D141
Other nonferrous metals, rolled, drawn, and extruded shapes, excluding wire
331491D2
Other nonferrous wire (except copper, aluminum, nickel, and precious metals)
331491D218
Other nonferrous wire (except copper, aluminum, nickel, and precious metals), including insulated wire and cable
331491E
APPARATUS WIRE AND CORD AND FLEXIBLE CORD SETS (EXCEPT WIRING HARNESSES), MADE IN PLANTS THAT DRAW WIRE
331491E1
Apparatus wire and cord and flexible cord sets (except wiring harnesses), made in plants that draw wire
331491E100
Apparatus wire and cord and flexible cord sets (except wiring harnesses), made in nonferrrous plants that draw wire
331491E110
Flexible cordage, thermostat insulated
331491E120
Flexible cordage, thermoplastic, including thermoplastic elastomers
331491E130
Apparatus wire, appliance fixture wire
331491E140
Apparatus wire appliance wiring material 14 gauge and larger, thermoset insulated
331491E150
Apparatus wire appliance wiring material 14 gauge and larger, thermoplastic insulated
331491E160
Apparatus wire, submersible pump cable
331491E170
Other apparatus wire and cordage
331491E180
Flexible cordage, extension cord sets
331491E190
Flexible cordage, fixed power supply cords
331491E1A0
Flexible cordage, detachable power supply cords
331491E1B0
Flexible cordage, retractable power supply cords
331491F
APPARATUS WIRE AND CORD AND FLEXIBLE CORD SETS (EXCEPT ALUMINUM, COPPER, WIRING HARNESSES AND FIBER OPTIC), MADE IN PLANTS THAT DRAW WIRE
331491F1
Apparatus wire and cord and flexible cord sets (except aluminum, copper, wiring harnesses and fiber optic), made in plants that draw wire
331491F100
Apparatus wire and cord and flexible cord sets (except aluminum, copper, wiring harnesses and fiber optic), made in plants that draw wire
331491G
MAGNET WIRE, MADE IN PLANTS THAT DRAW WIRE
331491G1
Magnet wire, made in plants that draw wire
331491G100
Magnet wire, made in plants that draw wire
331491G110
Magnet wire, made in plants that draw wire, film coated, class 105 and below, 7 AWG and larger round (include all square and rectangle)
331491G120
Magnet wire, made in plants that draw wire, film coated, class 105, 8~21 AWG
331491G130
Magnet wire, made in plants that draw wire, film coated, class 105, 22~32 AWG
331491G140
Magnet wire, made in plants that draw wire, film coated, class 105, 33 AWG and finer
331491G150
Magnet wire, made in plants that draw wire, film coated, class 130~155 , 7 AWG and larger round (include all square and rectangle)
331491G160
Magnet wire, made in plants that draw wire, film coated, class 130~155, 8~ 21 AWG
331491G170
Magnet wire, made in plants that draw wire, film coated, class 130~155, 22~ 32 AWG
331491G180
Magnet wire, made in plants that draw wire, film coated, class 130~155, 33 AWG and finer
331491G190
Magnet wire, made in plants that draw wire, film coated, class 180 and above, 7 AWG and larger round (include all square and rectangle)
331491G1A0
Magnet wire, made in plants that draw wire, film coated, class 180 and above, 8~21 AWG
331491G1B0
Magnet wire, made in plants that draw wire, film coated, class 105 and above, 22~32 AWG
331491G1C0
Magnet wire, made in plants that draw wire, film coated, class 105 and above, 33 AWG and finer
331491G1D0
Magnet wire, made in plants that draw wire, nonfilm coated, class 130 and below, fibrous
331491G1E0
Magnet wire, made in plants that draw wire, nonfilm coated, class 130 and below, tape
331491G1F0
Magnet wire, made in plants that draw wire, nonfilm coated, class 155 and above, fibrous
331491G1G0
Magnet wire, made in plants that draw wire, nonfilm coated, class 155 and above, tape
331491G1H0
Magnet wire, made in plants that draw wire, miscellaneous nonfilm coated, nec
331491G1J0
Magnet wire, made in plants that draw wire, miscellaneous film coated, nec
331491H
MAGNET WIRE, (EXCEPT ALUMINUM AND COPPER), MADE IN PLANTS THAT DRAW WIRE
331491H1
Magnet wire, (except aluminum and copper), made in plants that draw wire
331491H100
Magnet wire, (except aluminum and copper), made in plants that draw wire
331491M
Miscellaneous receipts
331491MM
Miscellaneous receipts
331491P
Primary products
331491S
Secondary products
331491SM
Secondary products and miscellaneous receipts
Furthermore, the definition of NAICS code 331491 includes the following:
Aircraft and automotive wire and cable (except aluminum, copper) made from purcha
Apparatus wire and cord (except aluminum, copper) made from purchased nonferrous
Bar, nonferrous metals (except aluminum, copper), made from purchased metals in w
Coaxial cable, nonferrous metals (except aluminum, copper), made from purchased n
Communications wire or cable, nonferrous metals (except aluminum, copper), made f
Cord sets, flexible, nonferrous metals (except aluminum, copper), made from purch
Energy wire or cable, nonferrous metals (except aluminum, copper), made from purc
Foil, gold, made by rolling purchased metals or scrap
Foil, nickel, made by rolling purchased metals or scrap
Foil, silver, made by rolling purchased metals or scrap
Gold and gold alloy bar, sheet, strip, and tubing made from purchased metals or s
Gold foil made by rolling purchased metals or scrap
Gold rolling and drawing purchased metals or scrap
Iridium bar, rod, sheet, strip and tubing made from purchased metals or scrap
Lead and lead alloy bar, pipe, plate, rod, sheet, strip, and tubing made from pur
Lead rolling, drawing, or extruding purchased metals or scrap
Magnesium and magnesium alloy bar, rod, shape, sheet, strip, and tubing made from
Magnesium foil made by rolling purchased metals or scrap
Magnesium rolling, drawing, or extruding purchased metals or scrap
Magnet wire, nonferrous metals (except aluminum, copper), made from purchased non
Mesh, wire, nonferrous metals (except aluminum, copper), made from purchased nonf
Molybdenum and molybdenum alloy bar, plate, pipe, rod, sheet, tubing, and wire ma
Molybdenum rolling, drawing, or extruding purchased metals or scrap
Nails, nonferrous metals (except aluminum, copper), made from purchased nonferrou
Nickel and nickel alloy pipe, plate, sheet, strip, and tubing made from purchased
Nickel rolling, drawing, or extruding purchased metals or scrap
Nonferrous metal shapes (except aluminum, copper) made by rolling, drawing, or ex
Nonferrous metal shapes (except aluminum, copper) made in integrated secondary sm
Nonferrous metal shapes (except aluminum, copper) made in integrated secondary sm
Nonferrous metal shapes (except aluminum, copper) made in integrated secondary sm
Nonferrous wire (except aluminum, copper) made from purchased nonferrous metals (
Nonferrous wire (except aluminum, copper) made in integrated secondary smelting m
Pipe, nonferrous metals (except aluminum, copper), made from purchased metals or
Plate, nonferrous metals (except aluminum, copper), made from purchased metals or
Platinum and platinum alloy rolling, drawing, or extruding from purchased metals
Platinum and platinum alloy sheet and tubing made from purchased metals or scrap
Precious metal bar, rod, sheet, strip, and tubing made from purchased metals or s
Rod, nonferrous metals (except aluminum, copper), made from purchased metals or s
Selenium bar, rod, sheet, strip, and tubing made from purchased metals or scrap
Silver and silver alloy bar, rod, sheet, strip, and tubing made from purchased me
Silver foil made by rolling purchased metals or scrap
Silver rolling, drawing, or extruding purchased metals or scrap
Solder wire, nonferrous metals (except aluminum, copper), made from purchased met
Strip, nonferrous metals (except aluminum, copper), made from purchased metals or
Tin and tin alloy bar, pipe, rod, sheet, strip, and tubing made from purchased me
Tin rolling, drawing, or extruding purchased metals or scrap
Titanium and titanium alloy bar, billet, rod, sheet, strip, and tubing made from
Titanium rolling, drawing, or extruding purchased metals or scrap
Tubing, nonferrous metals (except aluminum, copper), made from purchased metals o
Tungsten bar, rod, sheet, strip, and tubing made by rolling, drawing, or extrudin
Welding rod, uncoated, nonferrous metals (except aluminum, copper), made from pur
Wire cloth, nonferrous metals (except aluminum, copper), made from purchased meta
Wire screening, nonferrous metals (except aluminum, copper), made from purchased
Wire, nonferrous metals (except aluminum, copper), made from purchased nonferrous
Wire, nonferrous metals (except aluminum, copper), made in integrated secondary s
Zinc and zinc alloy bar, plate, pipe, rod, sheet, tubing, and wire made from purc
Zinc rolling, drawing, or extruding purchased metals or scrap
Zirconium and zirconium alloy bar, rod, billet, sheet, strip, and tubing made fro
Zirconium rolling, drawing, or extruding purchased metals or scrap.
Step 2. Filtering and Smoothing
Based on the aggregate view of non-ferrous metal rolling, drawing, and extruding excluding aluminum and copper 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 non-ferrous metal rolling, drawing, and extruding excluding aluminum and copper 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 controlling for the income variation across the pool of African cities).
This approach is useful across cities for which some notion of non-linearity exists in the aggregate consumption function. For some categories, however, the reader must realize that the numbers will reflect a city’s contribution to global latent demand and may never be realized in the form of local sales. For certain category combinations this will result in what at first glance will be odd results. For example, the latent demand for the category “space vehicles” will exist for cities in “Togo” even though they have no space program. The assumption is that if the economies in these countries did not exist, the world aggregate for these categories would be lower. The share attributed to these cities is based on a proportion of their income (however small) being used to consume the category in question (i.e., perhaps via resellers).
Step 5. Fixed-Parameter Linear Estimation
Nonlinearities are assumed in cases where filtered data exist along the aggregate consumption function. Because the world consists of more than 2000 cities, there will always be those cities, especially toward the bottom of the consumption function, where non-linear estimation is simply not possible. For these cities, equilibrium latent demand is assumed to be perfectly parametric and not a function of wealth (i.e., a city’s stock of income), but a function of current income (a city’s flow of income). In the long run, if a city has no current income, the latent demand for non-ferrous metal rolling, drawing, and extruding excluding aluminum and copper is assumed to approach zero. The assumption is that wealth stocks fall rapidly to zero if flow income falls to zero (i.e., cities which earn low levels of income will not use their savings, in the long run, to demand non-ferrous metal rolling, drawing, and extruding excluding aluminum and copper). In a graphical sense, for low income cities, latent demand approaches zero in a parametric lin
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