Market Potential Estimation Methodology
Overview
This study covers the world outlook for motor vehicle body and trailer manufacturing 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 motor vehicle body and trailer manufacturing. 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 motor vehicle body and trailer manufacturing 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 motor vehicle body and trailer manufacturing 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 motor vehicle body and trailer manufacturing 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 motor vehicle body and trailer manufacturing 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 motor vehicle body and trailer manufacturing. 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 motor vehicle body and trailer manufacturing. 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 motor vehicle body and trailer manufacturing.
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 “motor vehicle body and trailer manufacturing” 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 motor vehicle body and trailer manufacturing 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 “motor vehicle body and trailer manufacturing” as defined by the North American Industrial Classification system or NAICS (pronounced “nakes”). motor vehicle body and trailer manufacturing The NAICS code for motor vehicle body and trailer manufacturing is 3362. It is for this definition of motor vehicle body and trailer manufacturing that the aggregate latent demand estimates are derived. “Motor vehicle body and trailer manufacturing” is specifically defined as follows:
3362
Motor Vehicle Body and Trailer Manufacturing
33621
This industry comprises establishments primarily engaged in (1) manufacturing motor vehicle bodies and cabs or (2) manufacturing truck, automobile and utility trailers, truck trailer chassis, detachable trailer bodies, and detachable trailer chassis. The products made may be sold separately or may be assembled on purchased chassis and sold as complete vehicles.
Motor homes are units where the motor and the living quarters are contained in the same integrated unit, while travel trailers are designed to be towed by a motor unit, such as an automobile or a light truck.
336211
This U.S. industry comprises establishments primarily engaged in manufacturing truck and bus bodies and cabs and automobile bodies. The products made may be sold separately or may be assembled on purchased chassis and sold as complete vehicles.
3362111
Truck, bus, car, and other vehicle bodies, for sale separately
33621111
Bus bodies for sale separately
3362111101
Bus bodies for sale separately
33621112
Truck cabs for sale separately
3362111204
Truck cabs for sale separately
33621113
Vans with unit body~cab for sale separately
3362111307
Vans with unit body~cab for sale separately
33621114
Van bodies with separate cab for sale separately
3362111411
Refrigerated (except food service) van bodies with separate cab for sale separately
3362111413
Food service van bodies with separate cab for sale separately
3362111416
Other van bodies with separate cab for sale separately
33621115
Other truck and vehicle bodies for sale separately, including dumptruck lifting mechanisms and kit cars
3362111519
Tank bodies for sale separately
3362111522
Front loading garbage and refuse truck bodies (packer~types) for sale separately
3362111525
Rear loading garbage and refuse truck bodies (packer~types) for sale separately
3362111528
Side loading garbage and refuse truck bodies (packer~types) for sale separately
3362111531
Other garbage and refuse truck bodies (packer~types) for sale separately
3362111534
Beverage truck bodies for sale separately
3362111537
Dump truck bodies for sale separately
3362111541
Stake and platform truck bodies for sale separately
3362111543
Utility line service truck bodies for sale separately
3362111546
Other mobile service type truck bodies for sale separately
3362111549
Wrecker truck bodies for sale separately
3362111552
Passenger car bodies
3362111555
Kit cars
3362111558
Motor vehicle fifth wheels, new
3362111571
Other truck and vehicle bodies, including dumptruck lifting mechanisms
3362112
BUS BODIES AND TRUCK CABS FOR SALE SEPARATELY
33621121
Bus bodies for sale separately
3362112101
School bus bodies for sale separately
3362112103
Other bus bodies for sale separately
33621122
Truck cabs for sale separately
3362112201
Truck cabs for sale separately
3362113
Complete vehicles produced on purchased chassis
33621131
Buses, complete, produced on purchased chassis
3362113101
Buses, complete, produced on purchased chassis
33621132
Firefighting vehicles, complete, produced on purchased chassis
3362113219
Firefighting vehicles, complete, produced on purchased chassis
33621133
Other trucks, produced on purchased chassis
3362113304
Ambulance and rescue vehicles complete, produced on purchased chassis
3362113307
Vans, complete, produced on purchased chassis
3362113311
Tank trucks, complete, produced on purchased chassis
3362113313
Beverage trucks, complete, produced on purchased chassis
3362113316
Dump trucks, complete, produced on purchased chassis
3362113322
Utility line service trucks, complete, produced on purchased chassis
3362113325
Other mobile service type trucks, complete, produced on purchased chassis
3362113328
Other trucks, complete, produced on purchased chassis, designed primarily for transporting persons or goods, nec
3362113331
Other trucks, complete, produced on purchased chassis, not designed primarily for transporting persons or goods, nec
3362114
VAN BODIES FOR SALE SEPARATELY
33621141
Van bodies, walk_in, for sale separately
3362114101
Van bodies, walk_in, for sale separately
33621142
Van bodies with separate cab for sale separately
3362114201
Van bodies, insulated, for sale separately
3362114203
Van bodies, dry freight, for sale separately
3362114205
Van bodies, parcel delivery, for sale separately
3362114211
Other van bodies with separate cab for sale separately
3362115
OTHER TRUCK AND VEHICLE BODIES FOR SALE SEPARATELY (INCLUDING DUMPTRUCK LIFTING MECHANISMS AND KIT CARS)
33621151
Other truck and vehicle bodies for sale separately (including dumptruck lifting mechanisms and kit cars)
3362115101
Tank bodies for sale separately
3362115103
Front loading garbage and refuse truck bodies (packer_types) for sale separately
3362115105
Rear loading garbage and refuse truck bodies (packer_types) for sale separately
3362115107
Side loading garbage and refuse truck bodies (packer_types) for sale separately
3362115109
Other garbage and refuse truck bodies for sale separately
3362115111
Beverage truck bodies for sale separately
3362115113
Dump truck bodies for sale separately
3362115115
Dump truck lifting mechanisms
3362115117
Stake and platform truck bodies for sale separately
3362115119
Utility line service truck bodies for sale separately
3362115120
Other mobile service type truck bodies for sale separately
3362115123
Wrecker truck bodies for sale separately
3362115124
Ambulance and rescue vehicle bodies for sale separately
3362115125
Light truck (minivan, SUV, pickup truck) and passenger car bodies for sale separately
3362115127
Kit cars
3362115133
Motor vehicle fifth wheels, new
3362115141
All other truck and vehicle bodies for sale separately
3362117
BUSES AND FIREFIGHTING VEHICLES, COMPLETE, PRODUCED ON PURCHASED CHASSIS
33621171
Buses, complete, produced on purchased chassis
3362117101
School buses, complete, produced on purchased chassis
3362117103
Other buses, complete, produced on purchased chassis
33621172
Firefighting vehicles, complete, produced on purchased chassis
3362117201
Firefighting vehicles, complete, 19,500 lb or less, produced on purchased chassis
3362117203
Firefighting vehicles, complete, greater than 19,500 lb, produced on purchased chassis
3362119
OTHER TRUCKS, COMPLETE, PRODUCED ON PURCHASED CHASSIS
33621191
Other trucks, complete, produced on purchased chassis
3362119101
Ambulance and rescue vehicles, complete, produced on purchased chassis
3362119103
Vans, complete, produced on purchased chassis
3362119105
Tank trucks, complete, produced on purchased chassis
3362119107
Beverage trucks, complete, produced on purchased chassis
3362119109
Dump trucks, complete, produced on purchased chassis
3362119111
Utility line service trucks, complete, produced on purchased chassis
3362119113
Other mobile service type trucks, complete, produced on purchased chassis
3362119121
All other miscellaneous trucks, complete, produced on purchased chassis, designed primarily for transporting persons or goods
3362119123
All other miscellaneous trucks, complete, produced on purchased chassis, not designed primarily for transporting persons or goods
33621199
Upfitting
3362119901
Upfitting
336211M
Miscellaneous receipts
336211P
Primary products
336211S
Secondary products
336211SM
Secondary products and miscellaneous receipts
336212
This U.S. industry comprises establishments primarily engaged in manufacturing truck trailers, truck trailer chassis, cargo container chassis, detachable trailer bodies, and detachable trailer chassis for sale separately.
3362121
Truck trailers and chassis, with axle rating of 10,000 lbs or more
33621210
Truck trailers and chassis, with axle rating of 10,000 lb or more
3362121000
Truck trailers and chassis, with axle rating of 10,000 lb or more
3362121001
Steel closed top insulated, refrigerated vans
3362121003
Steel closed top semi~insulated, nonrefrigerated vans
3362121005
Steel closed top drop frame type (12 inches) vans
3362121007
Steel closed top livestock vans
3362121009
All other steel closed~top dry freight vans, including curtain, less than 30 feet long
3362121011
All other steel closed~top dry freight vans, including curtain, 30 feet or longer
3362121013
Steel open top vans including low side grain, fruit, etc.
3362121015
Aluminum closed top insulated, refrigerated vans
3362121017
Aluminum closed top drop frame type (12 inches) vans
3362121019
Aluminum closed top semi~insulated, nonrefrigerated vans
3362121021
Aluminum closed top livestock vans
3362121023
All other aluminum closed~top dry freight vans, including curtain, less than 30 feet long
3362121025
All other aluminum closed~top dry freight vans, including curtain, 30 feet or longer
3362121027
Aluminum open top vans including low side grain, fruit, etc.
3362121029
Tanks for flammable liquids (except casing head transport), including aircraft refuelers, all materials
3362121031
Tanks for asphalt, all materials
3362121033
Tanks coded for chemicals and acids, all materials
3362121035
All other tanks, including noncoded for chemicals and acids, high pressure, food and milk, sanitary, cryogenics, all materials
3362121037
Bulk commodity and dry materials complete truck trailers, including pneumatic and mechanical discharge, both tank and hopper types, (except van)
3362121039
Pole complete truck trailers, logging and pipe
3362121041
Platform complete truck trailers
3362121043
Low~bed heavy haulers, over 10~ton capacity, excluding tilt~bed trailers under 40~ton capacity
3362121045
Low~bed heavy haulers, over 10~ton capacity, excluding tilt~bed trailers with 40~ton capacity and over
3362121047
Dump trailers and dump chassis, highway type, rear, side, and bottom dump, including nonpneumatic hoppers for materials
3362121049
Dump trailers and dump chassis, highway type, rear, side, and bottom dump, including nonpneumatic hoppers for all other purposes, including demolition and excavation
3362121051
Automobile transport trailers
3362121053
Dollies and converter gear
3362121055
All other trailers and chassis (except detachable trailers and detachable trailer chassis)
3362121057
Detachable trailer bodies, containers, sold separately
3362121059
Detachable trailer chassis and running gear, sold separately
3362121061
FRP closed top insulated, refrigerated vans
3362121063
FRP closed top semi~insulated, nonrefrigerated vans
3362121065
FRP closed top drop frame type (12 inches) vans
3362121067
All other FRP closed~top dry freight vans, including curtain, less than 30 feet long
3362121069
All other FRP closed~top dry freight vans, including curtain, 30 feet long or longer
3362121071
FRP open top vans including low side grain, fruit, etc.
33621211
Truck trailers and chassis, with axle rating of 10,000 lb or more
3362121100
Truck trailers and chassis, with axle rating of 10,000 lb or more
3362123
Truck trailers and chassis, with axle rating of less than 10,000 lbs
33621231
Truck trailers and chassis, with axle rating of less than 10,000 lb
3362123100
Truck trailers and chassis, with axle rating of less than 10,000 lb
336212M
Miscellaneous receipts
336212P
Primary products
336212S
Secondary products
336212SM
Secondary products and miscellaneous receipts
336213
This U.S. industry comprises establishments primarily engaged in (1) manufacturing motor homes on purchased chassis and/or (2) manufacturing conversion vans on an assembly line basis. Motor homes are units where the motor and the living quarters are integrated in the same unit.
3362130
MOTOR HOMES, PRODUCED ON PURCHASED CHASSIS
33621301
Motor homes, produced on purchased chassis
3362130101
Conventional (type A) motor homes, produced on purchased chassis
3362130104
Chopped van (type C) motor homes, produced on purchased chassis
3362130107
Van camper (type B) motor homes, produced on purchased chassis
3362130111
Converted vans not qualifying as van camper (type B) motor homes, produced on purchased chassis
336213101
Conventional (type A)
336213102
Other motor homes
336213M
Miscellaneous receipts
336213P
Primary products
336213S
Secondary products
336213SM
Secondary products and miscellaneous receipts
336214
This U.S. industry comprises establishments primarily engaged in one or more of the following: (1) manufacturing travel trailers and campers designed to attach to motor vehicles; (2) manufacturing pickup coaches (i.e., campers) and caps (i.e., covers) for mounting on pickup trucks; and (3) manufacturing automobile, utility and light-truck trailers. Travel trailers do not have their own motor but are designed to be towed by a motor unit, such as an automobile or a light truck.
3362141
Travel trailers
33621411
Conventional travel trailers
3362141101
Conventional travel trailers, less than 20 ft. (6.096 m) in length
3362141104
Conventional travel trailers, 20 ft. (6.096 m) to 24 ft. 11 in. (7.595 m) in length
33621412
Fifth wheel travel trailers
3362141207
Conventional travel trailers, 25 ft. (7.620 m) to 29 ft. 11 in. (9.118 m) in length
336214125
Less than 30 feet in length
336214128
30 feet or more in length
33621413
Conventional travel trailers, 30 ft. (9.144 m) or more in length, including park models
3362141311
Conventional travel trailers, 30 ft. (9.144 m) or more in length, including park models
33621414
Fifth wheel travel trailers, less than 30 ft. (9.144 m) in length
3362141413
Fifth wheel travel trailers, less than 30 ft. (9.144 m) in length
33621415
Fifth wheel travel trailers, 30 ft. (9.144 m) or more in length
3362141516
Fifth wheel travel trailers, 30 ft. (9.144 m) or more in length
3362143
Automobile and light truck trailers
33621431
Automobile and light truck horse trailers, excl. those pulled by truck tractors
3362143101
Automobile and light truck horse trailers 26,000 lb or less GVW, excluding those pulled by truck tractors
3362143105
Automobile and light truck boat trailers 26,000 lb or less GVW
3362143108
Automobile and light truck mobile equipment trailers 26,000 lb or less GVW
3362143111
Other automobile and light truck trailers 26,000 lb or less GVW (including general utility, commercial display, etc.), for transport of goods
3362143114
Other automobile and light truck trailers 26,000 lb or less GVW (including general utility, commercial display, etc.), for other uses
3362143117
Automobile and light truck trailers 26,001 lb or more GVW
33621432
Boat trailers
33621433
Other automobile and light truck trailers
3362145
Camping trailers, campers, pickup covers, and parts
33621451
Camping trailers, campers, and pick-up covers
3362145101
Folddown camping trailers
33621452
Truck (pickup) campers (for sliding on and off trucks), caps, and box covers
3362145204
Truck (pickup) campers (for sliding on and off trucks), excluding parts
3362145207
Truck (pickup) caps and box covers, excluding parts
33621453
Parts and components, excluding appliances and furnishings
3362145311
Other parts for travel and camping trailers (including bodies and chassis), and parts for truck (pickup) campers and caps (excluding appliances and furnishings)
336214M
Miscellaneous receipts
336214P
Primary products
336214S
Secondary products
336214SM
Secondary products and miscellaneous receipts
Step 2. Filtering and Smoothing
Based on the aggregate view of motor vehicle body and trailer manufacturing 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 motor vehicle body and trailer manufacturing 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
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