solution manual econometric

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solution manual econometric

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- Regression Analysis
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You are on page 1of 10

CHAPTER 1:

THE NATURE OF REGRESSION ANALYSIS

1.1 (a) These rates (%) are as follows. They are year-over-year, starting with

1981.

USA

Canada Japan

UK

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

10.32

6.16

3.21

4.32

3.56

1.86

3.65

4.14

4.82

5.40

4.21

3.01

2.99

2.56

2.83

2.95

2.29

1.56

2.21

3.36

2.85

1.58

2.28

2.66

3.39

12.48

10.86

5.80

4.28

4.11

4.13

4.32

4.05

4.95

4.80

5.61

1.54

1.79

0.20

2.16

1.59

1.63

0.96

1.71

2.74

2.55

2.25

2.78

1.86

2.15

4.84

2.94

1.73

2.30

2.06

0.67

0.00

0.67

2.27

3.15

3.23

1.74

1.28

0.68

-0.08

0.08

1.84

0.58

-0.33

-0.66

-0.74

-0.92

-0.25

0.00

-0.34

13.28

11.97

9.49

7.67

5.83

2.53

3.24

2.73

3.46

3.34

3.16

2.41

2.14

1.60

1.78

2.02

1.19

0.65

0.52

1.68

1.65

1.94

2.08

2.16

1.70

6.34

5.31

3.30

2.39

2.04

-0.10

0.19

1.33

2.73

2.75

3.65

4.99

4.50

2.74

1.83

1.50

1.70

0.94

0.65

1.43

1.97

1.31

1.09

1.69

1.92

19.30

16.31

14.94

10.62

8.61

6.11

4.59

4.99

6.59

6.12

6.39

5.30

4.25

3.92

5.37

3.87

1.75

3.15

1.66

2.52

2.76

2.52

2.66

2.19

1.95

11.97

8.53

4.61

5.01

6.01

3.42

4.18

4.93

7.72

9.53

5.87

3.70

1.60

2.48

3.36

2.46

3.12

3.46

1.52

2.99

1.75

1.67

2.90

3.00

2.83

(b)

Inflation Rate over Time

25.00

20.00

15.00

USA

Canada

Japan

France

Germany

Italy

UK

10.00

5.00

19

80

19

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

0.00

-5.00

Year

(c) As you can see from this figure, the inflation rate of each of the countries

has generally declined over the years.

(d) As a measure of variability, we can use the standard deviation. These

standard deviations are 1.81, 2.85, 1.49, 3.40, 1.60, 4.70, and 2.65,

respectively, for the US, Canada, Japan, France, Germany, Italy, and the UK.

The highest variability is thus found for Italy and the lowest for Japan.

1.2. (a) The graph of the inflation rates of the six countries plotted against the

US inflation rate is as follows:

25.00

20.00

15.00

Canada

Japan

France

Germany

Italy

UK

10.00

5.00

0.00

0.00

2.00

4.00

6.00

8.00

10.00

12.00

-5.00

US Inflation Rate

(b) As the figure shows, in general the inflation rates of the six countries

are positively correlated with the US inflation rate.

(c) Remember that correlation does not mean causation. One may have

to consult a book on international macroeconomics to find out if there is any

causal connection between the US and the other countries' inflation rates.

1.3

(a) For better visual impression the logarithm of the exchange rate is

plotted on the vertical axis and time on the horizontal axis.

8.00

7.00

6.00

5.00

Australia

Canada

China, P.R.

Japan

Mexico

South Korea

Sweden

Switzerland

UK

4.00

3.00

2.00

1.00

0.00

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

-1.00

-2.00

Year

As you can see, the exchange rates show a good deal of variability. For

example, in 1985 one US dollar only bought about 0.257 Pesos, but in 2004 it

could buy about 11.29 Pesos.

(b) Again, the picture is mixed. For instance, between 1985 and 2006, the

U.S. dollar appreciated at a relatively high rate against the Peso, but for most

of the other currencies the relationship more slowly and steadily increased.

1.4.

1200

1000

800

600

400

200

0

55

60

65

70

75

80

85

90

95

the money supply is needed to finance the increased output.

1.5.

activity, (3) probability of getting caught, (4) probability of

conviction, (5) expected sentence after conviction. Note that it may

not be easy to get data on earnings in the illegal activities. Anyway,

refer to the Becker article cited in the text.

1.6.

1.7

One key factor in the analysis would be the labor force participation

rate of people in the 65-69 age category. Data on labor force

participation are collected by the Labor Department. If, after the

new law went into effect, we find increased participation of these

"senior" citizens in the labor force, that would be a strong indication

that the earlier law had artificially restricted their labor market

participation. It would also be interesting to find out what kinds of

of jobs these workers get and what they earn.

(a), (b) & (c). As the following figure shows, there seems to be a

positive relationship between the two variables, although it does not

seem to be very strong. This probably suggests that it pays to

advertise; otherwise, it is bad news for the advertising industry.

100

80

I

M

P

R

E

S

S

I

O

N

60

40

20

0

0

40

80

120

ADEXP

160

200

CHAPTER 2:

TWO-VARIABLE REGRESSION ANALYSIS: SOME BASIC IDEAS

2.1

Y varies with the fixed values of the explanatory variable (s).

2.2

population regression function is important, for the former is

is an estimator of the latter; in most situations we have a sample of

observations from a given population and we try to learn

something about the population from the given sample.

2.3

description of reality. Therefore, there is bound to be some difference

between the actual values of the regressand and its values

estimated from the chosen model. This difference is simply the

stochastic error term, whose various forms are discussed in the

chapter. The residual is the sample counterpart of the stochastic error

term.

2.4

and other summary measures to describe the behavior the of the

regressand, we are often interested in finding out if there are any

causal forces that affect the regressand. If so, we will be able to

better predict the mean value of the regressand. Also, remember

that econometric models are often developed to test one or more

economic theories.

2.5

linear in the variables.

2.6

Models (a), (b), (c) and (e) are linear (in the parameter) regression

models. If we let = ln 1, then model (d) is also linear.

2.7

becomes a linear regression model.

(b) The following transformation, known as the logit transformation,

makes this model a linear regression model:

ln [(1- Yi)/Yi] = 1 + 2 Xi + ui

(c) A linear regression model

(d) A nonlinear regression model

(e) A nonlinear regression model, as 2 is raised to the third power.

2.8

intrinsically linear regression model, as model (a) above. If 2 is

0.8 in model (d) of Question 2.7, it becomes a linear regression

6

2.9

regression model.

(b) Writing the model as (Xi/Yi) = 1 + 2 Xi makes it a linear

regression model.

(c) The transformation ln[(1 - Yi)/Yi] = - 1 - 2 Xi makes it a

linear regression model.

Note: Thus the original models are intrinsically linear models.

average have more growth in real wages than less export oriented

countries. That is why many developing countries have followed

an export-led growth policy. The regression line sketched in the

diagram is a sample regression line, as it is based on a sample

of 50 developing countries.

2.11 According to the well-known Heckscher-Ohlin model of trade,

countries tend to export goods whose production makes intensive

use of their more abundant factors of production. In other words,

this model emphasizes the relation between factor endowments

and comparative advantage.

2.12 This figure shows that the higher is the minimum wage, the lower

is per head GNP, thus suggesting that minimum wage laws may

not be good for developing countries. But this topic is controversial.

The effect of minimum wages may depend on their effect on

employment, the nature of the industry where it is imposed, and

how strongly the government enforces it.

2.13 It is a sample regression line because it is based on a sample

of 15 years of observations. The scatter points around the regression

line are the actual data points. The difference between the actual

consumption expenditure and that estimated from the regression line

represents the (sample) residual. Besides GDP, factors such as

wealth, interest rate, etc. might also affect consumption expenditure.

2.14

Male Labor Participation vs Unemployment

78.0

77.5

77.0

76.5

76.0

75.5

75.0

74.5

74.0

73.5

73.0

0

10

15

20

25

relatively reasonable. As the unemployment rate increases, the labor

force participation rate decreases, although there are several minor

peaks and valleys in the graph.

30

Female Labor Force Participation vs Unemployment Rate

10.5

9.5

8.5

7.5

6.5

5.5

4.5

3.5

51.0

52.0

53.0

54.0

55.0

56.0

57.0

58.0

59.0

60.0

to be at work: unemployment discourages female workers from

participating in the labor force because they fear that there

are no job opportunities.

61.0

(c) The plot of Male and Female Labor Force Participation against

AH82 shows the following:

80.0

75.0

70.0

65.0

F Labor Part

M Labor Part.

60.0

55.0

50.0

45.0

7.40

7.50

7.60

7.70

7.80

7.90

8.00

8.10

8.20

8.30

8.40

There is a similar relationship between the two variables for males and females,

although the Male Labor Participation Rate is always significantly higher than that

of the Females. Also, there is quite a bit more variability among the Female Rates.

To validate these statements, the average Male Rate is 75.4 %, whereas the Female

average is only 57.3 %. With respect to variability, the Male Rate standard

deviation is only 1.17 %, but the Female standard deviation is 2.73 %, more than

double that of the Male Rate. Keep in mind that we are doing simple bivariate

regressions here. When we study multiple regression analysis, we may have some

different conclusions.

10

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