Functional Forms of Linear Regression

Models

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 Log-Lin Model
• In this model, the dependent variable is logarithmic while the independent variable is
 

linear.
• This model is used when we are interested in finding the percentage growth in the
dependent variable for a unit change in the independent variable.

Illustration:
Suppose we want to measure the rate of growth of real GDP for the USA for the period
1960-2007. For this purpose, suppose we use the following model:

where RGDP stands for real GDP, r is the rate of growth (constant), and t is time
measured chronologically.
Taking the natural log of both sides of Equation 1, we obtain

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Taking the natural log of both sides of Equation 1, we obtain
 

Let
Therefore,

Adding the error term to this equation (to take into account the possibility that the
compound interest formula may not hold exactly), we obtain the following regression
model:

• The regression is like any other regression model; the only difference is that here the
regressor is "time", which takes values of 1,2, ... , 47,48.
• The model is called a semilog model because only one variable (in this case the
regressand) appears in the logarithmic form, whereas the regressor (time here) is in
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Interpretation of
 

In discrete terms, therefore

If we multiply by 100, then we would get growth rate in RGDP in Percentage Terms

Therefore, in case of a log-lin model, 100 times gives the growth rate of RGDP. 100 is
also known as semi-elasticity of the dependent variable with respect to the independent
variable.

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 Illustration of Log-Lin Model
• The dataset is from Econometrics by Example: Gujarati
• It has data on real GDP for the USA for 1960-2007

Note that the time variable can be taken to be

t = 0, 1, 2, …, 47

or t =1,2,3,…,47

or t=11,12,13,…,57 or t=111,112,…,147

The slope coefficients are independent of change of origin (but not of scale). Hence, in
all these cases, the slope coefficient will be the same. The intercept coefficient,
however, will be different.

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 Illustration of Log-Lin Model
Taking t = 0, 1, 2, …, 47

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 Interpretations
• These results show that over the period of 1960-2007 the USA's real GDP had been
 

increasing at the rate of 3.15% per year.

• This growth rate is statistically significant, for the estimated t value of about 90.82 is
highly significant. (p value <0.05)
• Interpretation of the Intercept Term

Therefore, Real GDP in 1960 = antilog )=2716.642 which is the beginning value of
real GDP, that is, the value at the beginning of 1960, our starting point. The actual value
of RGDP for 1960 was about $2,501.8 billion.

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 Illustration of Log-Lin Model
Taking t = 1, 2, …, 47,48

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 Interpretations
• These results show that over the period of 1960-2007 the USA's real GDP had been
 

increasing at the rate of 3.15% per year. (It is the same as the previous example because
the slope coefficient is independent of the change of origin).

• Interpretation of the Intercept Term

In this case t=0 (i.e. intercept term) will give log of Real GDP of 1959
Therefore, Real GDP in 1959 = antilog )=2632.428

If we want real GDP of 1959 from previous model, we will have to put t = -1

The regression equation according to the previous model is:

Putting t=-1

Again, Real GDP in 1959 )=2632.428 9

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 Illustration of Log-Lin Model
Taking t = 1960, 1961, …, 2007

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 Interpretations
• These results show that over the period of 1960-2007 the USA's real GDP had been
 

increasing at the rate of 3.15% per year. (It is the same because the slope coefficient is
independent of the change of origin).
Equation is:

In this case t=1959 (i.e. intercept term) will give log of Real GDP of 1959

Again, Real GDP in 1959 )=2634.741

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Difference between
Model:
 

gives the instantaneous (at a point in time) rate of growth. (Percentage increase in GDP
between time period t and t+1). r gives the compound (over a period of time) rate of
growth between 1960 and 2007.

We can compute r from

r=antilog()-1= 0.032 or about 3.2% which is slightly greater than the instantaneous rate of
growth of about 3.1 %.
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 Plot of Estimated, Actual Values and Residuals
• In order to get fitted (forecasted) values from a regression equation, click forecast in
the equation object and give it a name(rgdpf).
• genr rgdpf=exp(lrgdpf)

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 Linear Trend Model
Suppose that instead of estimating the below equation
 

We estimate the following model

• This is known as the linear trend model and the time variable is known as the trend
variable.
• The slope coefficient in this model gives the absolute (not relative or percentage)
change in RGDP per unit time period.
• If is positive, there is an upward trend in RGDP, but if it is negative, there is a
downward trend in RGDP.

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 Illustration of Linear Trend Model
Taking t = 1, 2, …, 47,48

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 Interpretations

• These results show that over the period 1960-2007, real GDP in the USA increased
by about $187 billion per year, showing an upward trend - not a surprising finding.

• The choice between the growth model and the linear trend model of is up to the
individual researcher, although for comparing RGDP across regions or countries it is
the relative growth that may be more relevant.

• Note that since the dependent variables in the log-linear and linear trend models are
not the same, it is not appropriate to compare the two R2 values in determining
which model to choose.

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