ASSIGNMENT 03 (Corrected)*

DUE DATE: 9 September 2022

UNIQUE NUMBER: 851500

This assignment deals with the following assessment criteria:

- Lesson 3 (Panel data methods)

Question 1: (15 marks)

1.1 Differentiate between the unique features of cross-section, time series and panel data.
(3)

1.2 In your own words, explain the reasons why a researcher will want to use panel data.
Also provide some real-life examples where panel data is used in South Africa. (4)

1.3 In your own words, describe how the fixed effects model differs from the random effects
model. (4)

1.4 Critically assess the assumptions of fixed and random effects models. (4)

Question 2: (25 marks)

In this question you need to analyse the annual unemployment rate (X) and annual weekly
wage (Y) data for three economies namely Delta, Alpha and Theta. The wages are paid in
Dollars. A basic theoretic specification for wages can be written as follows:

Y𝑖𝑡 = 𝛽0 + 𝛽1X𝑖𝑡 + 𝑢𝑖𝑡 (Model 1)

Where:
X: annual unemployment rate
Y: annual weekly wage

The data is available in the Excel sheet: ECS4863 2022 Assignment 03 data. Please note,
that when submitting your results, you should define the variables that you have created and
save the file using your student number. Failure to do so, will result in a zero mark for that
question. Where applicable, you can copy and paste your EViews output onto your answer
sheet.

*The corrected version of the assignment 03, has minor changes to the notation in Question 2,
as well as added information (see **) in Question 3

Open Rubric
Rubric
2.1 What is your a-priori expected relationship between unemployment and wages. Make
sure to provide a reference/source for your answer. (2)

2.2 Estimate the model (1) using pooled OLS and interpret the results. Are there any
Random effects in the model? (3)

2.3 Estimate the fixed effects model (1) and interpret the results. (2)

2.4 Estimate the random effects model (1) and interpret the results (2)

2.5 Which is better between fixed effects and the random effects models? Explain your
decision (2)

2.6 Estimate the following model (2) and discuss the results. Use Delta as the benchmark
country. (6)

Yit = 𝛽0 + 𝛽1𝐷2𝑖 + 𝛽2𝐷3𝑖 + 𝛽4𝑋𝑖𝑡 + 𝛽5𝐷2𝑖𝑋𝑖𝑡 + 𝛽6𝐷3𝑖𝑋𝑖𝑡 + 𝑢𝑖𝑡 (Model 2)

2.7 Estimate the least square dummy model (3). Use Delta as a benchmark country. Makes
sure to interpret the results. Also test for the redundancy of the inclusion of dummy
variables. (5)

Yit = 𝛽0 + 𝛽1𝐷2𝑖 + 𝛽2𝐷3𝑖 + 𝛽4𝑋𝑖𝑡 + 𝑢𝑖𝑡 (Model 3)

2.8 From the results above, which model between Pooled OLS in (2.2) and the least square
dummy variable in (2.6) would you choose? Justify your answer. (3)
 Question 3: (10 marks)

Suppose you are one of the consultants for an economic development consulting agency,
and you are required to estimate an economic growth model for a panel of four countries
using annual data starting from 1990 to 2010. The agency wants you to determine if drivers
of economic growth differ across groupings of G7 economies. As a consultant of the
agency, you are required to use the G7 economies in the IMF’s World’s Economic Outlook
report under the following groupings.
Group One: United Kingdom, United States of America, Germany, Canada
Group two: France, Germany, United Kingdom, Italy
Group three: United Kingdom, Germany, France, United States of America

Students whose surname start with a-h is group one; i-q is group two; and r-z is
group three

You must obtain this data from the International Monetary Fund World’s Economic Outlook
(WEO) database. Use the link: https://www.imf.org/en/Publications/WEO/weo-
database/2021/April/select-countries?grp=119&sg=All-countries/Advanced-
economies/Major-advanced-economies-(G7)

The economic growth model you are required to estimate is as follows:

𝐺 𝑟 ̂𝑜 𝑤 𝑡 ℎ 𝑖 𝑡 = 𝛽0 + 𝛽1𝐼𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛𝑖𝑡 + 𝛽2𝑝𝑜𝑝𝑔𝑖𝑡 + 𝛽3𝐸𝑥𝑝𝑔𝑖𝑡 + 𝑢𝑖𝑡

Where:
Growth: annual GDP (constant prices) growth rate
Inflation: annual consumer price inflation rate (end of period values),
Popg: annual population growth rate**
Expg: annual Volume of Exports of goods and services growth rate

**You need to calculate the annual population growth rate yourself, using the statistics of
population in millions

3.1 Estimate the economic growth model using the fixed effects, random effects and pooled
OLS models and comment on your results. Remember to clearly state your surname
and the group number that you are estimating. Failure to do so will result in you getting
zero marks for this question. (8)

3.2 Which model between the fixed effects and random effects will you choose? Explain
your answer (2)

[Total = 50 marks]