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Estimate a consumption function for the UK economy explaining the economic theory and statistical techniques you have used.
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Project: Estimate a consumption function for the UK economy explaining the economic theory and statistical techniques you have used. Introduction: Being able to model the behaviour of consumption is an immensely important economic tool, as consumption accounts for between half and two-thirds of the UK's GDP each year and so is critical in evaluating the performance of the economy and predicting future economic forecasts. During this project I will layout the theory of the consumption function and then work through the process of estimating a suitable equation. Theory: The consumption function is an expression of the relationship between consumption and income, the general rule being that as national income increases so does consumption as people have more money to spend. This theory was first put forward by John Maynard Keynes in 1936 in his The General Theory of Employment, Wages and Money. He argued that 'The fundamental psychological law...is that men are disposed as...
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