Simulation and Modelling - Old Questions

7.  What do you understand by distributed lag model? explain with example.

Models that have the property of changing only at fixed interval of time is called distributed lag model. It is used to predict current values of a dependent variable based on both the current values of an explanatory variable (independent variable) and the lagged (past period) values of this explanatory variable.

This model consists of linear algebraic equations that represent continuous system but data are available at fixed points in time.

For example: Mathematical model of national economy

Let

C = consumption

I = investment

T = Taxes

G = government expenditures

Y = national income

Then

C=20+0.7(Y-T)

I=2+0.1Y

T=0.2Y

Y=C+I+G

All the equation are expressed in billions of rupees. This is static model and can be made dynamic by lagging all the variables as follows

C=20+0.7(Y_-1-T_-1)

I=2+0.1Y_-1

T=0.2Y_-1

Y=C_-1+I_-1+G_-1

Any variable that can be expressed in the form of its current value and one or more previous value is called lagging variable. And hence this model is given the name distributed lag model. The variable in a previous interval is denoted by attaching –n suffix to the variable. Where –n indicate the nth interval.