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# Econometric Assignment

## Group Mem. ID.No.

1. Shambel Zenebe………………………………………02742/09
2. Bayisa Tolesa……………………………………………02087/09
3. Amarech Agmas………………………………………00029/10
4. Habtamu Dawit……………………………………….02353/09
5. Gemechis Regasa……………………………………..02326/09

## Submitted to Hunachew Kibret (M.sc)

1) The word Econometrics means measurement in economics.
 It is concerned with the use of statistical methods to attach numerical- values to
the parameters of economic models and also with the use of these models for
prediction.
 Generally, Econometrics is the application of statistical and mathematical
methods to the analysis of economic data with a purpose of giving empirical
content to economic theories and verifying or refuting them.
2) Methodology of econometrics are the following:
 let us consider the well-known Keynesian theory of consumption.

## 2.1 ) Statement of Theory or Hypothesis.

 Keynes postulated that the marginal propensity to consume (MPC), the rate of change of
consumption for a unit change in income, is greater than zero but less than 1.

## 2.2 ) Specification of the Mathematical Model of Consumption.

 For simplicity, a mathematical economist might suggest the following form of the Keynesian
consumption function:
Y = β1 + β2X 0 ≤ β ≤ 1………………………………………. (#)
where Y= consumption expenditure and X = income, and where β1 and β2, known as the parameters of
the model. The coefficient β2 measures the MPC (propensity to consume).

## 2.3 ) Specification of the Econometric Model of Consumption.

The purely mathematical model of the consumption function given in (#) is of limited interest to the
econometrician, for it assumes that there is an exact or deterministic relationship between consumption
and income. But relationships between economic variables are generally inexact. To allow for the inexact
relationships between economic variables, the econometrician would modify the deterministic
consumption function 1 as follows:
Y = β1 + β2X + ʋ………………………………………. (##)
where ʋ, known as the disturbance, or error, term, is a random (stochastic) variable that has well-defined
probabilistic properties. The disturbance term 𝝊 may well represent all those factors that affect
consumption but are not taken into account explicitly.

## 2.4 ) Obtaining Data.

 To estimate the econometric model given in(##), that is, to obtain the numerical values of β1
and β2, we need data. For empirical purposes, therefore, we need quantitative information on the
two variables. There are three types of data that are generally available for empirical analysis.
2.4.1) Time series: Are collected over a period of time, such as the data on GDP, employment,
unemployment, money supply, or government deficits. Such data may be collected at regular intervals
that are daily, weekly, monthly, quarterly or annually.

2.4.2) Cross-sectional: are data on one or more variables collected at one point in time 3. Pooled:
we have elements of both time series and cross-sectional data.

2.5) Estimation of the Econometric Model: Now that we have the data, our next task is to
estimate the parameters of the consumption function. The numerical estimates of the parameters
give empirical content to the consumption function.
Thus, the estimated consumption function is:
Y = β1 + β2X………………………………………………… (###)
The hat over a variable or parameter indicates that it is an estimated value.

2.6) Hypothesis Testing: Assuming that the fitted model is a reasonably good approximation of
reality, we have to develop suitable criteria to find out whether the estimates obtained in (###) are in
accord with the expectations of the theory that is being tested.

## 2.7) Forecasting or Prediction.

If the chosen model does not refute the hypothesis or theory under consideration, we may use it
to predict the future value(s) of the dependent variable Y on the basis of known or expected
future value(s) of the explanatory, or predictor, variable X.

2.8) Use of the Model for Control or Policy Purposes: We have the estimated consumption
function given in (###) and the government may use this estimated function for policy making
and further works.

## 3) Scope of Econometrics are listed below:

1)Developing statistical methods for the estimation of economic relationships
2)Testing economic theories and hypothesis
3)Evaluating and applying economic policies
4)Forecasting
5)Collecting and analyzing non-experimental or observational data.
 Objectives of Econometrics are:
 Analysis: - Obtaining empirical evidence to test the explanatory power of economic theories, to
decide how well they explain in the observed behavior of economic units.
 Forecast: - forecasting future values of economic magnitudes
 Policy making: - The knowledge of reliable estimates of coefficients of economic relationships
very important for the decision of firms as well as the formulation of economic policies.
 Steps in econometric analysis:

1) Specification of the model: - Specify the model with which the economic phenomena
will be explored empirically; formulation of the maintained hypothesis. It involves the
determination of:
 The dependent and explanatory variables which will be included in the model.
 Setting up the mathematical form of the model
 A prior theoretical expectation concerning sign and size of regression parameters.
2) Estimation of the model: - obtaining numerical estimates of parameters using some
econometric methods.
 Gathering the statistical data on the variable providing in the model.
 Examination of the identification condition of the functions
 Examination of the aggregation condition of the functions
 Examination of the design of correlation between explanatory variables
 Choice of an appropriate econometric technique
3) Evaluation of estimates: - determination of the reliability of results obtained from the
estimation stage.
 Consists of deciding whether the estimates of the parameters are theoretically
meaningful and statistically satisfactory.
 We use econometric a prior criterion: refer to the sign and the size of the parameters of
the model postulated by economic criteria.
 We use statistical criteria (first order test): the proportion of variation in the dependent
variable explained by changes in the independent variable (explanatory) variable and
verification that the spread of each estimated coefficient around the true parameters is
sufficiently narrow to give as confidence intervals for estimates.
 We use economic criteria (2nd order test): refer to tests that the assumption of the basic
regression model and particularly those about the disturbance or error term are satisfied.

model
4) a)

##  Minitab output for scatter plot of the given data.

Scatterplot of Y vs X
60

50

40
Y

30

20

10

X

b)

## The regression equation is given by:

Y = - 2.70 + 0.268 X
Generally, the minitab out of the regression become:
The regression equation is
Y = - 2.70 + 0.268 X

## Predictor Coef SE Coef T P

Constant -2.695 5.137 -0.52 0.614
X 0.26844 0.04033 6.66 0.000

## S = 6.20741 R-Sq = 84.7% R-Sq(adj) = 82.8%

Analysis of Variance

Source DF SS MS F P
Regression 1 1706.6 1706.6 44.29 0.000
Residual Error 8 308.3 38.5
Total 9 2014.9
 The scatter diagram of regression plot is as follow:

Scatterplot of Y vs X
60

50

40
Y

30

20

10

## 50 75 100 125 150 175 200

X

 Also we can apply spss software to fit regression line then we get the following graph:

C) i )
 output for minitab for residual also:
Y X RESI1 Y X RESI1
21 65 6.24665 27 90 5.53572
55 187 7.49728 44 157 4.55041
23 126 -8.12803 19 74 1.83072
8 52 -3.26366 17 88 -3.92741
28 143 -7.69147
47 195 -2.65022
collector A B C D E F G H I J
X 65 187 126 52 143 90 157 74 88 195
Y 21 55 823 8 28 27 44 19 17 47
Residuals 6.25 7.50 -8.13 -3.26 -7.69 5.54 4.55 1.83 -3.93 -2.65

## ii) To calculate we can use the software then it becomes

Mean = - 4.738 x 10 -15 Approximately is = 0

5) a)
β1 = -15424 β2 = 0.742 β3 = 8.044
Coefficientsa

Standardized
Unstandardized Coefficients Coefficients

## X3 8.044 2.984 .148 2.696 .019

b)
C)
R2 = 0.998
 Meaning: The explanatory variables per capital disposable income (PPDI (X2)) and (1956-
1970) (X3) are expresses the response variable that is per capital personal consumption
Model Summaryb

Change Statistics

## R Adjusted R Std. Error of R Square F Sig. F

Model R Square Square the Estimate Change Change df1 df2 Change
a
1 .999 .998 .997 12.835 .998 2513.521 2 12 .000

## a. Predictors: (Constant), X3, X2

b. Dependent Variable: Y