Studying the various

Nikhil Prasad Yuvraj Handa

factors(Inflation, Life Expectancy)
Soumya Dubey
that affect the GDPRajan Baa

Somdev Kaushik Jagateja Talada

Akshay Kalson
 Country
GDP PC($) Inflation(%) Investment Ratio(%) Life Expectancy(years) Literacy Rates(%)
(PCI) (I) (INV) (LE) (LIT)
India 2188 2.83 33.256 68.947 69
China 10099 2.3 43.334 76.386 95
Sri Lanka 4470 4.3 27.853 75.408 91
USA 65062 1.9 20.238 81.097 86
UK 42036 1.9 17.156 81.167 99
Russia 11461 5.3 18.836 70.443 100
Pakistan 1456 9.41 15.118 66.7 55

Bangladesh
Australia
Canada
The data that we took ?
1882
57204
48601
5.55
1.8
1.9
28.972
26.1
23.711
72.709
82.906
82.563
60
99
99
France 43500 1.1 21.476 82.74 99
Germany 49692 1.3 18.828 81.449 99
Japan 41418 0.2 21.998 83.995 99
Kenya 1991 4.35 22.545 63.062 72

Argentina 9055 54.7 18.388 76.817 98

Zimbabwe 1381 66.8 12.952 61.742 84

Indonesia 3971 2.48 34.562 69.409 93

Korea 32766 0.4 27.972 82.626 98
Norway 82773 2.9 28.556 82.028 100
Thailand 7570 1.24 24.132 74.985 96
 Literacy Rates(%)
Inflation(%) (I) (LIT)
80 Investment
GDP PC($)
Ratio(%)
(PCI)(INV)
Life Expectancy(years) (LE)
90000 120
90
70
50
80000 100
80 45
60
40
70000
70 80
50 35

Plot of the data

60000 30
60
40 60
25
50000 Inflation(%) (I)
50 20 Literacy Rates(%) (LIT)
30 Investment Ratio(%) (INV)
40
15
40000 GDP PC($) (PCI)
20 40 10 Life Expectancy(years) (LE)
20
30000 5
10 30
0
20000 0

Korea
India

USA

Australia

Argentina

Indonesia
Canada
China
Sri Lanka

Russia

France

Zimbabwe
UK

Bangladesh

Kenya
Germany
Japan

Norway
Thailand
Pakistan

0 20

10000
10

0
0
 We are going to do LS
What type of analysis we are
doing here?
Explained Variable Explanatory Variable
Inflation
Per capita GDP Investment Ratio
Life Expectancy
Literacy Rate
Let us explain the explanatory
variables first.
Inflation is rise in general level of
prices over time.
Inflation
 Economists believeHigh
What Causes high growth
rates ofof
money supply causes high rates of
Inflation?
inflation.
Sometimes fluctuations in inflation are
caused by change in demand of goods or
services available in supply.
Inflation reduces the level of business
investment and hence affects GDP.
Harms of Inflation?
 Rising GDP per capita is directly
linked toLife
higher life expectancy .
Expectancy

1$ 33 Days
In our analysis we have taken Investment Ratio as
percentage of GDP.
Investment Ratio
Its lower in poor countries.
Developing countries having low per capita income
have high investment ratios.
Rich countries have higher literacy rates. And hence
Literacy
directly Rate
affect per capita GDP
Regression Results
 The independent variables inflation, investment, life
Inference?
and literacy are significant, as can be seen from their t-
statistics and related probabilities.
High adjusted R Square represents good fit!
Som
Soumya
 Jarque Bera Test
• Test of normality for a large sample
 Jarque Bera Test
• Null Hypothesis states that the Error
terms/residuals follow Normal Probability
distribution
• Test statistic follows Chi Square distribution
(follows for large n) with 2 degree of
freedom
• When the error is normally distributed, this
tests for the joint null hypothesis that
skewness is zero and the kurtosis is 3
 Life
Investment Expectancy(yea
GDP PC($) Inflation(%) Ratio(%) rs) Literacy Rates(%)
Country

(PCI) (I) (INV) (LE) (LIT)

India 2188 2.83 33.256 68.947 69
China 10099 2.3 43.334 76.386 95
Sri Lanka 4470 4.3 27.853 75.408 91
USA 65062 1.9 20.238 81.097 86
UK 42036 1.9 17.156 81.167 99
Russia 11461 5.3 18.836 70.443 100
Pakistan 1456 9.41 15.118 66.7 55
Bangladesh 1882 5.55 28.972 72.709 60
Australia 57204 1.8 26.1 82.906 99
Canada 48601 1.9 23.711 82.563 99
France 43500 1.1 21.476 82.74 99
Germany 49692 1.3 18.828 81.449 99
Japan 41418 0.2 21.998 83.995 99
Kenya 1991 4.35 22.545 63.062 72
Argentina 9055 54.7 18.388 76.817 98
Zimbabwe 1381 66.8 12.952 61.742 84
Indonesia 3971 2.48 34.562 69.409 93
Korea 32766 0.4 27.972 82.626 98
Norway 82773 2.9 28.556 82.028 100

Thailand 7570 1.24 24.132 74.985 96

5
Series: RESIDUAL
Sample 1 16
4 Observations 16

Mean -1723.462
3 Median -3901.319
Maximum 14377.48
Minimum -18246.12
2
Std. Dev. 8918.463
Skewness 0.187964
1
Kurtosis 2.382700

Jarque-Bera 0.348254
0 Probability 0.840190
-20000 -10000 0 10000
handa
WHITE HETEROSKEDASTICITY TEST
Heteroskedasticity refers to the situation in which the
variance of the error term in the regression equation is
not constant but varies with the independent variable. In
the presence of Heteroskedasticity, the Ordinary Least
Square estimates, although still unbiased are no longer
efficient.
We refer to the WHITE HETEROSKEDASTICITY TEST for the
detection of Heteroskedasticity, wherein one simply
computes an auxiliary regression of the squared OLS
residuals on a constant and all non redundant variables in
the set consisting of the regressors, their squares and
their cross products.
WHITE HETEROSKEDASTICITY TEST
 RESULTS
• We see the test statistic nR2 = 14.7639< χ () = . So the
null hypothesis of homoscedasticity cannot be rejected.
Therefore there is no heteroscedasticity in the data.
• Also the p-value corresponding to the f-statistic suggests
that we can not reject the null hypothesis that there is no
heteroskedasticity in the data.
nikhil
 Sorted Data
Country

GDP PC($) Inflation(%) Investment Ratio(%) Life Expectancy(years) Literacy Rates(%)

(PCI) (I) (INV) (LE) (LIT)

Zimbabwe 1381 66.8 12.952 61.742 84

Kenya 1991 4.35 22.545 63.062 72

Pakistan 1456 9.41 15.118 66.7 55

India 2188 2.83 33.256 68.947 69

Indonesia 3971 2.48 34.562 69.409 93

Russia 11461 5.3 18.836 70.443 100

Bangladesh 1882 5.55 28.972 72.709 60

Sri Lanka 4470 4.3 27.853 75.408 91

China 10099 2.3 43.334 76.386 95

Argentina 9055 54.7 18.388 76.817 98

UK 42036 1.9 17.156 81.167 99

Germany 49692 1.3 18.828 81.449 99

Canada 48601 1.9 23.711 82.563 99

Korea 32766 0.4 27.972 82.626 98

France 43500 1.1 21.476 82.74 99

Japan 41418 0.2 21.998 83.995 99

 Result of Goldfeld Quandt test
 We divide the entire set of 16 observations into 3 groups of first 6 next 4 and last 6

 We run two separate regressions corresponding to the first and the last 6 observations and note
the values of RSS thus obtained

 The RSS from the first group comes out to be 3350352

 The RSS from second group comes out to be 4534277

 This follows an F-distribution with d.f 1,1

 From statistical table under F-distribution, we see that:

F(1,1, 0.05)=161 and F(1,1, 0.01)=4052

 Thus the F-statistic obtained is less than the tabular value at both 5% and 1% level of
significance. We therefore accept the null hypothesis of Homoscedasticity (constant variance)
at both 5% and 1% level of significance, i.e., there is no problem of Heteroscedasticity in our
data set
 Parameter Stability test
10.0 1.6

7.5
1.2
5.0

2.5
0.8

0.0

-2.5 0.4

-5.0
0.0
-7.5

-10.0 -0.4
6 7 8 9 10 11 12 13 14 15 16 6 7 8 9 10 11 12 13 14 15 16

CUSUM 5% Significance CUSUM of Squares 5% Significance

The CUSUM test The CUSUMSQ test

Since the Cumulative sum is inside the area Here we can say that the parameters
between the two critical lines we can say are constant in terms of variance.
that the parameter are constant in terms of
intercept.
rajan
 Serial Correlation Test
• Serial between a serial and its lag value i.e.
the error for the period y is correlated
with the error for the period x
 Consequences
• Smaller estimated standard error. As a result,
Larger t value
𝑥ҧ −0
t=
𝑠/
𝑛

• Regression coefficient that appears to be

significant may not be significant
• Durbin Watson Test:
For first order serial correlation

• The lagrange multiplier or LM test :

For higher order serial correlation
Serial Correlation
Test
jagat
 MULTICOLLINEARITY
• In order to check whether or not there is any problem of
correlation among the explanatory variables, is that, whether or
not our model suffers from the problem of multicollinearity, we
use the Variance Inflating Factor(VIF) where,
• VIF = 1/1-Rj2
• We regress each explanatory variable on the others referred to as
Auxiliary Regressions. R2 the squared multiple correlation
coefficients obtained from each of these regressions.
• If the VIF corresponding to any auxiliary regression is greater than
10 we say that the model has a severe multicollinearity problem
and VIF between 2 and 10 implies moderate multicollinearity. The
general solution suggested is to drop the corresponding regressor.
• We have obtained the following result:

• From the results obtained above we see that

in our model the VIF of all the estimated
coefficients are lesser than 2.5. Thus we
conclude that the model is free from
multicollinearity or in other words, the
explanatory variables are uncorrelated.
 CONCLUSION
• We reach the conclusion that the behavior of
Per Capita Income(GDP) can indeed be
expressed as a linear regression model of the
annual average rate of Inflation, Investment
Ratio, Life Expectancy at birth and Adult
Literacy Rate.