Student: Zehra Memmedzade

Group: 1045

Independent work for Econometrics

1. Take any variables (being economically related is preferred) – Y, X1, X2 and

X3. Note that Y will be your dependent variable. The data can be either cross-
sectional or time series but, number of observations must be greater than 30.
You can take any country, region, company or institution.

My research will be based on time-series data. Here dependent variable is GDP of France
from 1980 to 2018. İndependent variables are capital investment as percentage of GDP,
inflation rate, population growth. Number of observations is 39.

GDP of Capital investment as % of Inflation Population growth

Year France(billions) GDP % %
1980 701,29 25,75 13,6 0,44
1981 615,55 23,52 13,3 0,49
1982 584,88 23,8 12 0,52
1983 559,87 21,75 9,5 0,55
1984 530,68 21,23 7,7 0,56
1985 553,14 21,17 5,8 0,56
1986 771,47 21,76 2,5 0,57
1987 934,17 22,26 3,3 0,57
1988 1018,85 23,34 2,7 0,56
1989 1025,21 24,27 3,5 0,54
1990 1269,18 24,41 3,2 0,51
1991 1269,28 23,6 3,2 0,55
1992 1401,47 21,96 2,4 0,5
1993 1322,82 19,54 2,1 0,43
1994 1393,98 20,32 1,7 0,37
1995 1601,09 20,51 1,8 0,36
1996 1605,68 19,62 2 0,35
1997 1452,88 19,45 1,2 0,35
1998 1503,11 20,68 0,7 0,37
1999 1492,65 21,36 0,5 0,51
2000 1362,25 22,49 1,7 0,68
 2001 1376,47 22,16 1,6 0,73
2002 1494,29 21,32 1,9 0,73
2003 1840,48 21,19 2,1 0,71
2004 2115,74 21,89 2,1 0,74
2005 2196,13 22,45 1,7 0,75
2006 2318,59 23,24 1,7 0,7
2007 2657,21 24,16 1,5 0,62
2008 2918,38 24,13 2,8 0,56
2009 2690,22 21,33 0,1 0,51
2010 2642,61 21,95 1,5 0,49
2011 2861,41 23,22 2,1 0,48
2012 2683,83 22,63 2 0,48
2013 2811,08 22,29 0,9 0,51
2014 2852,17 22,71 0,5 0,47
2015 2438,21 22,71 0 0,36
2016 2471,29 22,61 0,2 0,26
2017 2586,29 23,37 1 0,22
2018 2777,54 23,46 1,9 0,17

2. You will estimate two different models by using E-views. In each model there
must be at least one “log” and one “lin” independent variable:

Dependent Variable: LOG(GDP_OF_FRANCE_IN_BILLION)

Method: Least Squares
Date: 05/22/20 Time: 03:30
Sample: 1980 2018
Included observations: 39

Variable Coefficient Std. Error t-Statistic Prob.  

C 5.012017 0.835624 5.997930 0.0000

CAPITAL_INVESTMENT_AS
___ 0.133418 0.037830 3.526801 0.0012
INFLATION -0.136660 0.015785 -8.657838 0.0000
POPULATION_GROWTH___ -0.488516 0.360265 -1.355989 0.1838

R-squared 0.690607    Mean dependent var 7.318038

Adjusted R-squared 0.664088    S.D. dependent var 0.538623
S.E. of regression 0.312175    Akaike info criterion 0.606408
Sum squared resid 3.410861    Schwarz criterion 0.777030
Log likelihood -7.824961    Hannan-Quinn criter. 0.667626
F-statistic 26.04157    Durbin-Watson stat 0.255559
Prob(F-statistic) 0.000000
My first model is: LOG (GDP_OF_FRANCE_IN_BILLION) = 5.012017+ 0.133418 *
CAPITAL_INVESTMENT_AS___ -0.136660 * INFLATION -0.488516 *
POPULATION_GROWTH___
C = 5.012017

B1 = 0.133418

B2 = -0.136660
B3 = -0.488516

3. Interpretation of regression parameters and goodness-of-fit.

B1 = 0.133418. It means 1unit increase in capital investment per capita will cause 13.3418%
increase in GDP of France, while holding other factors fixed, in average. It is log-lin relationship.
B2 = -0.136660. It means 1% increase in inflation rate will cause 13.6660% decrease in
France’s GDP, while holding other factors fixed, in average. It is log-lin relationship.
B3= -0.488516. It means 1% increase in population growth will cause 48.8516% decrease in
France’s GDP, while holding other factors fixed, in average. It is log-lin relationship.
Goodness-of-FIT = 0.690607. It indicates that if we show percentage that 69.0607%. Therefore,
it means that 69.0607% of Dependent variable is explained by independent variables. If it is
close to 100%, it means that dependent variable is explained by independent variables so well

Dependent Variable: GDP_OF_FRANCE_IN_BILLION

Method: Least Squares
Date: 05/22/20 Time: 18:11
Sample: 1980 2018
Included observations: 39

Variable Coefficient Std. Error t-Statistic Prob.  

C -12826.97 4404.537 -2.912218 0.0062

LOG(CAPITAL_INVESTMENT_AS
___) 5018.544 1433.501 3.500900 0.0013
INFLATION -178.4109 26.94292 -6.621810 0.0000
POPULATION_GROWTH___ -950.9765 618.8819 -1.536604 0.1334

R-squared 0.580492    Mean dependent var 1710.293

Adjusted R-squared 0.544534    S.D. dependent var 793.6983
S.E. of regression 535.6530    Akaike info criterion 15.50176
Sum squared resid 10042344    Schwarz criterion 15.67239
Log likelihood -298.2844    Hannan-Quinn criter. 15.56298
F-statistic 16.14366    Durbin-Watson stat 0.239371
Prob(F-statistic) 0.000001
My second model is: GDP_OF_FRANCE_IN_BILLION = -12826.97 + 5018.544 *
LOG(CAPITAL_INVESTMENT_AS___) -178.4109 * INFLATION -950.9765 *
POPULATION_GROWTH___

C= -12826.97

B1= 5018.544. It means, when capital investment increase 1 unit, GDP will increase 50.18544
units, while holding other factors fixed, in average. It is lin-log relationship.
B2= -178.4109. It means, when inflation rate increase 1%, GDP will decrease 178.4109 $, while
holding other factors fixed, in average. It is lin-lin relationship.
B3= -950.9765. It means, when population growth increase 1%, GDP will decrease 950.9765$,
while holding other factors fixed, in average. It is lin-lin relationship.
Goodness-of-FIT = 0.580492. It indicates that if we show percentage 58.0492% of France’s
GDP is explained by capital investment, inflation rate and population growth.

4. Comment on individual statistical significance of all coefficients in one model.

For the first model:

Therefore, we can test individual significance by T-test.
In our first model, t-statistical values are like this:
T-value of capital investment is 3.526801
T-value of inflation rate is -8.657838
T-value of population growth is -1.355989

a) For β 1 null hypothesis is H 0. β 1=0 means that capital investment has no effect on GDP of
France.

T=3.526801>c (critical value) at all significance levels (1%-c=2.57;5%-1.96;10%) so it is

outside of the interval, that is why, on average, while holding other factors constant, the
impact of capital investment over GDP is statistically significant. So we reject null hypothesis
at 10% of significance level.

b) For β 2 null hypothesis is H 0. β 2=0 means that inflation rate has no effect on GDP of France.

T-value of inflation rate coefficient = -8.657838

T= -8.657838 < c (critical value) at all significance levels (1%-c=2.57;5%-1.96;10%) so it is
outside of the interval, that is why, on average, while holding other factors constant, the
impact of inflation rate over GDP is statistically significant. So we reject null hypothesis at
10% of significance level.
c) T-value of population growth coefficient = -1.355989

At 1% level of significance, while holding other factors fixed, on average, we fail to reject null
hypothesis. -2,57<t<2.57, that is why on average while holding other factors fixed, the impact of
population growth over GDP is statistically insignificant.

At 5% level of significance, while holding other factors fixed, on average, we fail to reject null
hypothesis. -1,96<t<1,96 that is why on average while holding other factors fixed, the impact of
over population growth GDP is statistically insignificant.

5. Comment on joint significance of the variables in one model. Test overall

significance as well as significance of joint impact of “ X 1 and X 2 ”, “ X 1 and X 3 ”,
and “ X 2 and X 3 ”. Show clearly what your null hypothesis is, and why the
impact is “statistically significant” or “insignificant”.
To test significance of joint impact of all independent variables, we look at F (probability).

a) My first model is: LOG (GDP_OF_FRANCE_IN_BILLION) = 5.012017+ 0.133418 *

CAPITAL_INVESTMENT_AS___ -0.136660 * INFLATION -0.488516 *
POPULATION_GROWTH___

b) All variables: Null Hypothesis is that joint impact of all independent variables is
statistically insignificant. So:

H 0 :α 1=α 2=α 3 =0

H 1 : at least one is n' t 0

Dependent Variable: LOG(GDP_OF_FRANCE_IN_BILLION)
Method: Least Squares
Date: 05/22/20 Time: 03:30
Sample: 1980 2018
Included observations: 39

Variable Coefficient Std. Error t-Statistic Prob.  

C 5.012017 0.835624 5.997930 0.0000

CAPITAL_INVESTMENT_
AS___ 0.133418 0.037830 3.526801 0.0012
INFLATION -0.136660 0.015785 -8.657838 0.0000
POPULATION_GROWTH
___ -0.488516 0.360265 -1.355989 0.1838

R-squared 0.690607    Mean dependent var 7.318038

Adjusted R-squared 0.664088    S.D. dependent var 0.538623
S.E. of regression 0.312175    Akaike info criterion 0.606408
Sum squared resid 3.410861    Schwarz criterion 0.777030
Log likelihood -7.824961    Hannan-Quinn criter. 0.667626
F-statistic 26.04157    Durbin-Watson stat 0.255559
Prob(F-statistic) 0.000000

To test the joint significance of all variables. According to this test we see that the F-statistics
probability is 0.000000%.
So, we reject Null Hypothesis at 100% confidence level, joint impact of all variables is significant
at 100% confidence level. It also means all variables are statistically significant

1) X 1 and X 2 - Null Hypothesis is that joint impact of capital investment and inflation rate is
statistically insignificant. So:
H 0 :α 1=α 2=0 H1: at least one isn’t 0

Wald Test:
Equation: Untitled

Test Statistic Value df Probability

F-statistic  37.60278 (2, 35)  0.0000

Chi-square  75.20556  2  0.0000

Null Hypothesis: C(2)=C(3)=0

Null Hypothesis Summary:

Normalized Restriction (= 0) Value Std. Err.

C(2)  0.133418  0.037830

C(3) -0.136660  0.015785

Restrictions are linear in coefficients.

From Wald test we can observe the probability of F-statistic is 0% and 0%

So, we reject Null Hypothesis at 100% confidence level, joint impact of capital investment and
inflation rate is significant at 100%confidence level. It means that these variables are
statistically significant.

2) X 2 and X 3 - Null Hypothesis is that joint impact of inflation rate and population growth is
statistically insignificant. So:
H 0 :α 2 =α 3 =0 H 1: at least one isn’t 0

Wald Test:
Equation: Untitled

Test Statistic Value df Probability

t-statistic  0.973806  35  0.3368
F-statistic  0.948298 (1, 35)  0.3368
Chi-square  0.948298  1  0.3302

Null Hypothesis: C(3)=C(4)

Null Hypothesis Summary:

Normalized Restriction (= 0) Value Std. Err.

C(3) - C(4)  0.351856  0.361320

Restrictions are linear in coefficients.

The probability of F-statistic is close to zero (0.3368) and 0%<1%

So, we reject Null Hypothesis at 99% confidence level, joint impact of inflation rate and
population growth is significant at 99%confidence level. It means that these variables are
statistically significant.

3) X 1 and X 3 Null Hypothesis is that joint impact of capital investment and population growth is
statistically insignificant. So:

H 0 :α 1=α 3 =0 H 1: at least one isn’t 0

Wald Test:
Equation: Untitled

Test Statistic Value df Probability

t-statistic  1.704390  35  0.0972

F-statistic  2.904946 (1, 35)  0.0972
Chi-square  2.904946  1  0.0883

Null Hypothesis: C(2)=C(4)

Null Hypothesis Summary:

Normalized Restriction (= 0) Value Std. Err.

C(2) - C(4)  0.621934  0.364901

Restrictions are linear in coefficients.

Again, the probability of F-statistic is close to zero and 0%<1%

So, we reject Null Hypothesis at 99% confidence level, joint impact of capital investment and
population growth is significant at 99%confidence level. It means that these variables are
statistically significant.
6) Examine whether there is functional misspecification problem in your models
or not. Do the same for one model. Show clearly what your null hypothesis is, and
provide comprehensive justification for your decision.

Ramsey RESET Test

Equation: UNTITLED
Specification: LOG(GDP_OF_FRANCE_IN_BILLION) C CAPITAL_INVEST
        MENT_AS___ INFLATION POPULATION_GROWTH___
Omitted Variables: Squares of fitted values

Value df Probability
t-statistic  1.930008  34  0.0620
F-statistic  3.724931 (1, 34)  0.0620
Likelihood ratio  4.054465  1  0.0441

F-test summary:
Mean
Sum of Sq. df Squares
Test SSR  0.336786  1  0.336786
Restricted SSR  3.410861  35  0.097453
Unrestricted SSR  3.074075  34  0.090414

LR test summary:
Value df
Restricted LogL -7.824961  35
Unrestricted LogL -5.797728  34

Unrestricted Test Equation:

Dependent Variable: LOG(GDP_OF_FRANCE_IN_BILLION)
Method: Least Squares
Date: 05/23/20 Time: 09:33
Sample: 1980 2018
Included observations: 39

Variable Coefficient Std. Error t-Statistic Prob.  

C -7.512370 6.539017 -1.148853 0.2586

CAPITAL_INVESTMENT_AS__
_ -1.110507 0.645547 -1.720257 0.0945
INFLATION 1.075322 0.628152 1.711883 0.0960
POPULATION_GROWTH___ 4.365510 2.538855 1.719480 0.0946
FITTED^2 0.633757 0.328370 1.930008 0.0620

R-squared 0.721156    Mean dependent var 7.318038

Adjusted R-squared 0.688351    S.D. dependent var 0.538623
S.E. of regression 0.300689    Akaike info criterion 0.553730
Sum squared resid 3.074075    Schwarz criterion 0.767007
Log likelihood -5.797728    Hannan-Quinn criter. 0.630252
F-statistic 21.98302    Durbin-Watson stat 0.404091
Prob(F-statistic) 0.000000
The relationship between independent and dependent variables is not always linear. To test this, we
will test it with quadratic functional form. We will also include the interaction term. Interaction basically
happens when independent variable has a different impact on the result depending on the values of
other independent variables. In order to check misspecification problem in our model we will use
Ramsey RESET Test.
H0: There is no functional form of misspecification problem
H1: there is functional form of misspecification problem
Here we need to look at the f-statistics probability which is equal to 0.0620

As our probability is less than < 0.5 it is statistically significant. So, we reject our null hypothesis H 0.
This means that, there is functional form of misspecification problem in our model.

7) Include a quadratic term (of any independent variable) to one model and interpret
the association.

Dependent Variable: LOG(GDP_OF_FRANCE_IN_BILLION)

Method: Least Squares
Date: 05/23/20 Time: 09:54
Sample: 1980 2018
Included observations: 39

Variable Coefficient Std. Error t-Statistic Prob.  

C 7.424883 10.57537 0.702092 0.4874

CAPITAL_INVESTMENT_AS__
_ -0.086097 0.959786 -0.089704 0.9290
INFLATION -0.138097 0.017189 -8.033852 0.0000
POPULATION_GROWTH___ -0.458126 0.388627 -1.178833 0.2466
CAPITAL_INVESTMENT_AS__
_^2 0.004949 0.021623 0.228895 0.8203

R-squared 0.691083    Mean dependent var 7.318038

Adjusted R-squared 0.654740    S.D. dependent var 0.538623
S.E. of regression 0.316489    Akaike info criterion 0.656151
Sum squared resid 3.405613    Schwarz criterion 0.869428
Log likelihood -7.794935    Hannan-Quinn criter. 0.732673
F-statistic 19.01548    Durbin-Watson stat 0.258819
Prob(F-statistic) 0.000000

Let’s take the quadratic form of capital investment.

Model: LOG (GDP_OF_FRANCE_IN_BILLION) = 7.424883-0.086097*

CAPITAL_INVESTMENT_AS___ -0.138097 * INFLATION -0.458126 *
POPULATION_GROWTH___ + 0.004949 * CAPITAL_INVESTMENT_AS___^2
B1= -0.086097, It means 1unit increase in capital investment per capita will cause 8.6097% decrease
in GDP of France, while holding other factors fixed, in average. But probability is 0.9290 and this
number is statistically insignificant, that is why we cannot interpret the coefficient like this definitely.

8) Include an interaction term (of any independent variable) to one model and interpret
the association.
We’ll add interaction term INFLATION * POPULATION_GROWTH___

Dependent Variable: LOG(GDP_OF_FRANCE_IN_BILLION)

Method: Least Squares
Date: 05/23/20 Time: 10:21
Sample: 1980 2018
Included observations: 39

Variable Coefficient Std. Error t-Statistic Prob.  

C 4.955349 0.812120 6.101749 0.0000

CAPITAL_INVESTMENT_AS___ 0.117041 0.037891 3.088893 0.0040
INFLATION 0.125260 0.149231 0.839370 0.4071
POPULATION_GROWTH___ 0.423654 0.624223 0.678690 0.5019
INFLATION*POPULATION_GROWT
H___ -0.529916 0.300326 -1.764467 0.0866

R-squared 0.716561    Mean dependent var 7.318038

Adjusted R-squared 0.683215    S.D. dependent var 0.538623
S.E. of regression 0.303157    Akaike info criterion 0.570074
Sum squared resid 3.124732    Schwarz criterion 0.783351
Log likelihood -6.116448    Hannan-Quinn criter. 0.646596
F-statistic 21.48883    Durbin-Watson stat 0.329636
Prob(F-statistic) 0.000000

Here our probability is not statistically significant with 0.0866. This means there is no interaction effect
between population growth and inflation.