Professional Documents
Culture Documents
Faculty of Economy
December, 20 2011 EXAMINATIONS
Economic Statistics
In conducting this test is only allowed to use pocket calculators, at most, with
basic statistics functions. You cannot use programmable calculators.
You may use statistical tables (Standard Normal, Student t and F) and
SUMMARY OF UNIVARIATE AND BIVARIATE AND MULTIPLE REGRESSION
FORMULAS attached to this part and
Part 1
EXERCISE 1 [10 points]
A large food company conducts a survey in a sample of 64 countries in order to know the
factors that influence the sales of a new energy bar.
The dependent variable Y consists of the monthly sales (thousands of euro) while the
independent variables (regressors) are X2: television promotion expenditures (thousands
of euro), X3 radio promotion expenditures (thousands of euros), X4 Price in euros.
We choose to fit to the data a model of multiple linear regression. Here are: i) the mean
and standard deviation for each variable, ii) estimates of the parameters of the model with
Gretl OLS procedure.
Std. Error
7654.85
t-ratio
-1,256077
X2 (TV)
1.53
0.11
13,909091
X3 (RADIO)
1.47
1.26
1,1666667
X4 (PRICE)
-175.52
901.42
-0,194715
const
44410.92
0.782
71.81
1583.45
7.74766e-020
a) [point 1] State the multiple regression equation in conventional term and interpret
the meaning of the slopes, b2 and b3 and b4 in this problem
b) [point 1] Predict the Sales for an expenditure in TV Advertising of 30000
Thousands euro and in RADIO advertising of 5000 Thousands euro and with a
price of 3 euro.
c) [points 2] Which type of advertising is more effective? Explain
d) [points 2] Determine whether there is a significant relationship between Sales and
the three independent variables (TV, RADIO and PRICE) at the 0.05 level of
significance. Interpret the meaning of the p-value.
.
SOLUTION
a) Y-hat = -9615.08 + 1.53*X2 + 1.47*X3 -175.52*X4
(7654.85)
(0.11)
(1.26)
(901.42)
sX 2
sY
sX3
sY
1.53*
886.64
0.857
1583.45
1.47 *
805.32
0.748
1583.45
R 2 (k 1)
0.782 / 3
0.2607
71.81
2
(1 R ) (n k ) (1 0.782) / 60 0.00363
(Restricted)
Y 2 X 2 3 X 3 4 X 4 u
1
(Complete or Unrestricted)
Does X3 and X4 variables have a significant impact?
We perform an F test comparing RSS when the X3 and X4 variables are included
RSSc / df 2
(1 Rc2 ) / df 2
(1 Rc2 ) (m k )
F (2, 60)
0.826
(1 Rc2 ) (m k )
(1 0.782)
(4 2)
Decision Rule
The test statistic is F = 0.826 which falls in the rejection region. Do not accept H0
and conclude that the introduction in the model of X3 and X4 does not provide a
significant improvement in the explanation of Y
EXERCISE 2
Use the information in the table below to answer the following questions.
(dollar)
South Korea
W 2,600
1,475 W/$
(won)
Israel
sh 12.50
(shekel)
Poland (zloty) zl 5.30
3.70 sh/$
3.46 zl/$
a. Calculate whether the won, the shekel, and the zloty are overvalued or
undervalued
with respect to the U.S. dollar in terms of Big Macs purchases. Explain what it
means to be overvalued or undervalued.
Answer: One way to answer this is to calculate the dollar price of a Big
Mac in
South Korea, Israel and Poland using current exchange rates. If the
dollar price is
less than the price of a Big Mac in the US then the countrys currency
is
undervalued. If otherwise, then the currency is overvalued.
In South Korea: W2600 / 1475W/$ = $1.76. This is less than $2.53, the
US price,
therefore the South Korean won is undervalued.
In Israel: sh12.50 / 3.7 sh/$ = $3.38. This greater than $2.53 therefore
the Israeli
shekel is overvalued.
In Poland: zl5.30 / 3.46 zl/$ = $1.53 This is less than $2.53 therefore
the Polish zloty
is undervalued.
Answer: A second way to answer this (solution proposed by the
student DANNI Andrea is to calculate the purchasing power parity
(PPP) using the Big Mac price from each country:
In South Korea: USPPPSK = PW / P$ = 2600 / $2.53 = 1027.67 W/$
In Israel: USPPPIS = Psh / P$ = sh12.50 / $2.53 = 4.94 sh/$
In Poland USPPPPL = Pzl / P$ = zl 5.30 / $2.53 = 2.09 zl/$
If the PPP is less than the Exchange Rate, than the countrys currency
is undervalued. If otherwise, then the currency is overvalued.
For example for South Korea we have: (USPPPSK USEXRSK)/ USEXRSK = 0.303. That is Won is undervalued regarding Us dollar of 30.3%.
b. What would the exchange rates have to be in order to equalize Big Mac
prices
between South Korea and the United States, Israel and the United States, and
Poland
and the United States?
Answer: Here you can simply apply the purchasing power parity
formula using the
Big Mac price from each country,
In South Korea USPPPSK = PW / P$ = R2600 / $2.53 = 1027.67W/$
In Israel USPPPIS = Psh / P$ = sh12.50 / $2.53 = 4.94 sh/$
In Poland USPPPPL = Pzl / P$ = zl 5.30 / $2.53 = 2.09 zl/$
These are the PPP exchange rates based on Big Mac prices.
c. If in the long run the exchange rate moves to satisfy Big Mac purchasing
power
parity (PPP), will the won, shekel, and zloty, appreciate or depreciate in terms
of
dollars? Explain the logic.
Answer: In order to reach the PPP exchange rate the won would have
to change from 1475 W/$ to 1027.67 W/$ . Since this exchange rate is
the value of the $ ($s in the denominator) the dollar would need to
depreciate, therefore the won would
appreciate. This means also that if the won is undervalued the won
would need to
appreciate to reach its PPP value.
Similarly, the shekel exchange rate would have to change from 3.70
sh/$ to 4.94 sh/
$, representing a $ appreciation, or a shekel depreciation.
For the zloty, the exchange would need to change from 3.46 zl/$ to
2.09 zl/$,
meaning the $ would have to depreciate or the zloty appreciate.
X1
X2
X3
Grammer School
High School
Undergraduate
Graduate
Thus no matter how many other variables are in the model, in order to include
education level in your model you will have to add 3 new dummy variables (X's) to
the model.
How to Interpret Dummy Variables.
When a Multiple Regression equation is calculated by the computer you will get a b
value associated with each X variable, whether they are dummy variables or not.
The significance of the model and each individual coefficient is tested the same as
before. Concluding that a dummy variable is significant (rejecting the null and
concluding that this variable does contribute to the model's explanatory power)
means that the fact that we know what category a person falls in helps us explain
more variance in Y. So for instance in the example above with education level, if we
test the B associated with X1 and determine it to be "significant" then that tells us
that X1 (high school vs. grammer school) does contribute to the model's
explanatory power. Thus by knowing whether a person has a high school education
(versus on a grammer school education) helps us explain more of whatever the Y
variable is. This process is repeated for each dummy variable, just as it is for each X
variable in general.
The Location Quotient Technique is the most commonly utilized economic base
analysis method. It was developed in part to offer a slightly more complex model to
the variety of analytical tools available to economic base analysts. This technique
compares the local economy to a reference economy, in the process attempting to
identify specializations in the local economy. The location quotient technique is
based upon a calculated ratio between the local economy and the economy of some
reference unit. This ratio, called an industry "location quotient" gives this technique
its name
Location Quotient Calculation
To calculate any location quotient the following formula is applied. Note that in this
formula we are comparing the Regional Economy (often a county) to the National
Economy. Location quotients may also be calculated that compare the county to a
state.
Regional Employment in
Industry k
Location
Quotient=
National Employment in
Industry k
/
Examining this formula more closely, we see that to allocate employment to the
basic and non-basic sectors, location quotients are calculated for each industry.
Simply stated, the location quotient method compares Local Employment to
National Employment. The LQ provides evidence for the existence of basic
employment in a given industry.
Interpreting Calculated Location Quotients
Interpreting the Location Quotient is very simple. Only three general outcomes are
possible when calculating location quotients. These outcomes are as follows:
LQ < 1.0
LQ = 1.0
LQ > 1.0
Basic Sector
= Regional
Employment
Total
Regional
National
Employment
Employment
Industry k
Employment
National
Employment
Industry k
Total
National
Employment
Industry k
Part 2
1) [1 points]
Consider the following data related to US GDP: GDP: $12 Trillion
Consumption: $9.2 Trillion
Government Purchases: $1.8 Trillion
US investment abroad: $0.4 Trillion
Imports: $1.5 Trillion
Domestic Investment: $1.6 Trillion
Private Savings: $2.2 Trillion
1a) What is the value of US exports?
(A)
R2 Y.2345 = 0.86