Suggested Answers to ECON2170(001) Homework assignment # 1:

(Refers to Student Solutions Manual for Use with Basic Econometrics, Gujarati(2003))

2.2 PRF:
i i i
u X Y + + =
2 1
| |
SRF: X Y
i 2 1

| | + = and
i i i
Y Y u

= or
i i i
u Y Y

+ =
The SRF is an estimator of the PRF. In most situations we have a sample of
observations from a given population and we try to learn something about the
population from a given sample.

2.3 A regression model try to explain the relationship between the Y and X variables,
however, the simple regression can never be a completely accurate description of
reality. Therefore, there is bound to be some difference between the actual values
of the dependent variable and its values estimated from the chosen regression
model. Thus the error term u can be treated as the other factors that are not
captured (other than the X variable) in the regression to explain the independent
variable. And the residual u can be treated as the estimated values apart from
the actual values.

2.15



(b) As total expenditure increases, on the average, expenditure on food also increase.
But there is greater variability between the two variables after the total expenditure
exceeds the level of 600.

(c.) We would not expect the expenditure on food to increase linearly (i.e., in a straight
line fashion) for ever. Once basic needs are satisfied, people will spend relatively less on
food as their income increases. At the higher levels of income (over 600), consumers
will have a more variability behavior on food expenditure.

3.9 For the normal SRF: X Y
i 2 1

| | + = and ) (

2 1
X X Y
i
+ = o o
(a) X Y
2 1

| | = and Y
n
X X
Y X X Y =

= =

) (
) (
2 2 1
o o o
Because 0 =

x
(b) The

=
2
2

x
xy
| where x, and y are the deviation form (i.e., (X- X ) and (Y-Y ).)
Therefore for the second model:
i i i
u X X Y + + = ) (
2 1
o o
Let x = (X- X ) and ) ( ) ( X X X X = x
n
X X
x =

) (

From the formula:

= =
2 2
2

x
xy
x
y x
o =

=
2
2

x
xy
|
And the

=
2
2 2
1
)

var(
x n
X o
| =
n x n
x
2
2
2 2
1
) var(
o
o
o = =

And

=
2
2
2
)

var(
x
o
| =

=

=
2
2
2
2
2
) (
) var(
x x x
o o
o

(c.) Model II may be easier to use when the values of X are large numbers, but now with
high speed computers this is no longer a problem. Therefore model I and II are basically
the same.




=0
=0
3.10 Since

= = 0
i i
y x , that is the sum of the deviations from mean value is
always zero (i.e., 0 = = y x ). Therefore,

=
2 2
2
) (
) )( (

x
xy
x x
y y x x
|

3.21

i
Y
i
X
i i
Y X

2
i
X

2
i
Y
Original
data
1110 1700 205500 322000 132100
Revised
data
1110 1680 204200 315400 133300
Therefore, the corrected coefficient of correlation is
=


=


] ) ( ][ ) ( [
2 2 2 2
2
Y Y n X X n
Y X XY n
R 0.9688
Since the revised values of Y are separated larger than the old data, therefore it reduces
the goodness of fit (i.e. the R
2
is reduced).

3.22. (a) Generally, the three series have moved upward; in the case of gold price there
is considerable volatility.

(b) If the hypothesis were true, we would expect 1
2
> | .

(c )

The slope coefficient in the gold price equation is not statistically significant. (Because
the t-value is less than 2.)

It seems the stock market is a better hedge against inflation than gold.

5.3 (a) use the formula:
)

(
0

2
2 *
|
|
se
t

= to obtained the missing figures.

(b) On average, mean hourly wage goes up by about 72 cents (or 0.724 units of wage)
for an additional year of schooling.
(c) Since the t-value of
2

| is 8.67 which is great than the critical t

c
(0.025, 11)
= 2.201,
therefore, you can reject the null hypothesis that there is zero effect of education on
wages.

(d) ANOVA table can be set up by using the information from the estimated results as
SS df MSS
Regression (ESS)

2 2
y R
0.9077*105.118
=95.415
k-1
=2-1
ESS/(k-1)
=95.415
Residuals (RSS)

2 2
) 1 ( y R or
RSS= 9.692810
n-k
=13-2=11
RSS/(n-k)
=0.88116
TSS

2
y =105.118
n-1=13-1=12
Since

2
y can be obtained by
2 2
) 1 (
y
n y o =

=105.118 and
y
o =2.959706
which can be obtained from the S.D. dependent var from the EVIEWS output.
(e) The R
2
is related to the F-value and also related to the t-value of
2

|
The formula are
F k k n
F k
R
k n R
k R
F
) 1 ( ) (
) 1 (
) /( ) 1 (
) 1 /(
2
2
2
+

= =>


= and
) 2 (
2

2
2
2
2
+
=
n t
t
R
|
|







5.8 (a) There is positive association in the LFPR in 1972 related to the LFPR in 1968,
The estimated result indicates one unit rate increase in 1968 will lead about 0.65 unit
of rate in 1972 which is not surprising in view of the fact since WWII there has been a
steady increase in the LFPR of women.)
(b) Use the one-tail t-test:
Set up the hypothesis as: H
0
: 1
2
= | and H
1
: 1
2
> |
The compute t-value is 7542 . 1
1961 . 0
1 6560 . 0
)

(
1

2
2 *
=

=
|
|
se
t
Compare to the critical t
c
(0.05. 17)
= 1.740, so the absolute compute t-value is greater than
the t-value at 5% of significant level, therefore, reject the null hypothesis.

(c) The mean LFPR is: 0.2033+0.6560(0.58) ~0.5838.
The 95% Confident interval is: 0.5838 2.11*Se(mean of forecast value)
Where the critical t-value is 2.11.
(d) Without the actual data given in the question, therefore it is difficult to calculate and
test the error term is normally distributed or not.

5.16 (a) If the PPP theory holds, one would expect the intercept to be zero and the slope
to be one.

(b)

Set up the hypothesis as: H
0
: 1
2
= | and H
1
: 1
2
= |
Since the t-value is greater than critical t
c
(0.025, 28)
= 2.048
Therefore, you can reject the null hypothesis.
The intercept is statistically insignificant so that it is believed to be zero.

(c) Since the Big Mac index is crude and hilarious to begin with, it probably doesnt
matter. However, for the sample data, the results do not support the PPP theory.





5.17(a)

(b)

The Jarque-Bera is 0.9721 with a p-value of 0.615. Therefore, asymptotically cannot be
rejected the normality assumption.
(c ) The compute t-value is: 36 . 6
045 . 0
1 714 . 0
)

(
1

2
2
=

=
|
|
se
t .
The critical t
c
(0.025, 22) = 2.074. Therefore, the absolute t-value is greater than the
critical t, so reject the null hypothesis that 1
2
= | .
(d) ANOVA table can be set up by using the information from the estimated results as
SS df MSS
Regression (ESS)

2 2
y R
0.918114*1071.98
=984.20
k-1
=2-1
ESS/(k-1)
=984.20
Residuals (RSS)

2 2
) 1 ( y R or
RSS= 87.782
n-k
=24-2=22
RSS/(n-k)
=3.990
TSS

2
y =1071.98
n-1=24-1=23
Since

2
y can be obtained by
2 2
) 1 (
y
n y o =

=23*6.827
2
= 1071.98 and
y
o =6.827 which can be obtained from the S.D. dependent var from the EVIEWS
output.