Graded Discussion Board

Fall 2019

Business Econometric (ECO601)

A model with a single dependent variable and one or more explanatory variables is called a single equation model. On the other hand, a system of equations which expresses a set of relationships among variables or shows the joint dependence of variables is called a simultaneous equation. In the simultaneous equation model, there is a set of equations in which a dependent variable in one equation may be the explanatory variable in some other equations. For example, consider the following demand-supply model.

Equilibrium condition:

Where, Qd is quantity demand, Qs is quantity supplied, P = Price, Y = disposal income, G = cost of main raw materials and t = time.

This is an example of simultaneous equation model.

Requirement:

By applying OLS (Ordinary Least Squares) to individual equation of this simultaneous equation model, which type of problem will have to face?
Comment on the identification status of equation (1) and (2).
Which method can be applied for the estimation of equation (1) and equation (2)?