Selftest Problems And Solutions

ST6.1 Gross domestic product (GDP) is a measure of overall activity in the economy. It is defined as the value at the final point of sale of all goods and services produced during a given period by both domestic and foreign-owned enterprises. GDP data for the 1966-2000 period offer the basis to test the abilities of simple constant change and constant growth models to describe the trend in GDP over time. However, regression results generated over the entire 1966-2000 period cannot be used to forecast GDP over any subpart of that period. To do so would be to overstate the forecast capability of the regression model because, by definition, the regression line minimizes the sum of squared deviations over the estimation period. To test forecast reliability, it is necessary to test the predictive capability of a given regression model over data that was not used to generate that very model. In the absence of GDP data for future periods, say 2002-2007, the reliability of alternative forecast techniques can be illustrated by arbitrarily dividing historical GDP data into two subsamples: a 1966-95 30-year test period, and a 1996-2000 5-year forecast period. Regression models estimated over the 1966-95 test period can be used to "forecast" actual GDP over the 1996-2000 period. In other words, estimation results over the 1966-95 subperiod provide a forecast model that can be used to evaluate the predictive reliability of the constant growth model over the 1996-2000 forecast period.

The accompanying table shows GDP figures for the U.S. economy for the 35-year period from 1966-2000.

Gross Domestic Product, 1966-2000 (in $ billions)

Year GDP In GDP Time Period

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