9/5/2020

Assignment of
Econometrics
Submitted by: Hassan Muhammad
Roll No: M-45
Subject: Econometrics
Submitted To : Dr. Azamt Hayat

Windows User
[COMPANY NAME]
 ASSIGNMENT QUESTIONS AND SOLUTION

Q.2.19) The relationship between nominal exchange rate and

relative prices. From the annual observations from 1980 to 1994,
the following regression results were obtained, where Y =
exchange rate of the German mark to the U.S. dollar (GM/$) and
X = ratio of the U.S. consumer price index to the German
consumer price index; that is, X represents the relative prices in
the two countries:

Yt = 6.682 −4.318Xt r2 = 0.528 se = (1.22) (1.333)

a. Interpret this regression. How would you interpret r2?
b. Does the negative value of Xt make economic sense? What
is the underlying economic theory?
c. Suppose we were to redefine X as the ratio of German CPI to
the U.S. CPI. Would that change the sign of X? And why?

(SOLUTION.2.19)
a) The slope value of 4.318 suggests that over the period 1980-
1994, for every unit increase in the relative price, on average,
the (GW$) exchange rate declined by about 4.32 units. That is,
the dollar depreciated because it was getting fewer German
marks for every dollar exchanged. Literally interpreted, the
intercept value of 6.682 means that if the relative price ratio
were zero, a dollar would exchange for 6.682 German marks. Of
course, this interpretation is not economically meaningful.
 b) The negative value often slope coefficient makes perfect
economic sense because if U .S. prices go up faster than German
prices, domestic consumers will switch to German goods, thus
increasing the demand for GM, which will lead to appreciation
of the German mark. This is the essence of the theory of
purchasing power parity (PPP), Or the law of one price.

C) In this case the slope coefficient is expected to be positive,

for the higher the German CPI relative to the U. S. CPI, the
higher the relative inflation rate in Germany which will lead to
appreciation of the U.S. dollar. Again, this is in the spirit of the
PPP.

Q.2.20) Table 3.6 gives data on indexes of output per hour (X)
and real compensation per hour (Y) for the business and
nonfarm business sectors of the U.S. economy for 1959–1997.
The base year of the indexes is 1982 = 100 and the indexes are
seasonally adjusted.

a. Plot Y against X for the two sectors separately.

b. What is the economic theory behind the relationship

between the two variables? Does the scatter gram support the
theory?

c. Estimate the OLS regression of Y on X. Save the results for a

further look after we study Chapter 5.
 (SOLUTION.2.20)
a) . Plot Y against X for the two sectors separately: -

FOR BUSINESS SECTOR

FOR NON-BUSINESS SECT

 b) As both the diagrams show, there is a positive relationship
between wages and productivity, which is not surprising in view
of the marginal productivity theory of labor economics.

c) OLS estimation of Y on X: -

FOR BUSINESS SECTOR

FOR NON BUSINESS SECTOR

Q.3.21) From a sample of 10 observations, the

following results were obtained:
Yi = 1110 Xi = 1700 XiYi = 205,500
X2 i = 322,000 Y2 i = 132,100
with coefficient of correlation r = 0.9758. But on
rechecking these calculations it was found that two
pairs of observations were recorded:
What will be the effect of this error on r? Obtain the
correct r.

SOLUTION.3.21
Subtract Addition

90 120 80 110
140 220 150 210
Sum:230 240 230 220
Sum:27700 62800 28900 56200
Therefore, the corrected coefficient of correlation is
0.9688.

Q.3.22 Table 3.7 gives data on gold prices, the Consumer

Price Index (CPI), and the New York Stock Exchange (NYSE)
Index for the United States for the period 1977–1991. The
NYSE Index includes most of the stocks listed on the NYSE,
some 1500 plus.

a. Plot in the same scatter gram gold prices, CPI, and the
NYSE Index.
b. An investment is supposed to be a hedge against
inflation if its price and/or rate of return at least keeps
pace with inflation. To test this hypothesis, suppose you
decide to fit the following model, assuming the scatterplot
in a suggests that this is appropriate:
Gold price = β1 + β2 CPIt +ut
NYSE index = β1 + β2 CPIt +ut
 SOLUTION.3.22

a) scatter diagram

EXPLANTION: -
1)we can see from the scatter diagram that the gold price
is more scattered on diagram which tell that that there is
week relationship between gold price and CPI.
2) while New York stock exchange value is straight regular
which shows that there is strong relationship between
NYSE and CPI.
b) Hypothesis testing for gold price and NYSE: -

 HYPOTHESIS TESTING FOR GOLD PRICE

 HYPOTHESIS TESTING FOR NEW YORK

STOCK EXCHANGE
Q.3.23). Table 3.8 gives data on gross domestic product
(GDP) for the United States for the years 1959–1997.
a). Plot the GDP data in current and constant (i.e., 1992)
dollars against time.
b). Letting Y denote GDP and X time (measured
chronologically starting with 1 for 1959, 2 for 1960,
through 39 for 1997), see if the following model fits the
GDP data:
Yt = β1 + β2 Xt +ut
Estimate this model for both current and constant-dollar
GDP.
c). How would you interpret β2?
d). If there is a difference between β2 estimated for
current-dollar GDP and that estimated for constant-dollar
GDP, what explains the difference?

(SOLUTION.3.23
a) Plot the GDP data in current and constant (i.e., 1992)
dollars against time.
b) Letting Y denote GDP and X time (measured
chronologically starting with 1 for 1959, 2 for 1960,
through 39 for 1997), see if the following model fits the
GDP data:
Yt = β1 + β2 Xt +ut
Estimate this model for both current and constant-dollar
GDP.

 FOR NOMINAL GDP(NGDP)

  FOR REAL GDP(RGDP)

c)The slope here gives the rate of change of GDP per

time period .
d)The difference between two show that inflation over
time.
d)As the figure and regression tell that nominal GDP
has been rising faster than real GDP which tell that
inflation has been growing over the time.
Q.3.24) Using the data given in Table I.1 of the
Introduction, verify Eq. (3.7.1).

(SOLUTION.3.24)
Scatter diagram of given data
Regression anaiysis of the data
Yt =-299.5913+ 0.72183X
Here; Y=PCE X=GDP

HENCE: This is strightforward.