FUNDAMENTALS OF

ECONOMETRICS
DR ABDUL WAHEED
PhD Econometrics
FUNDAMENTALS OF
ECONOMETRICS
Week 5
Lecture 10
 Lin-Log models
In the Lin-Log models, we are interested in finding
the absolute change in Y responding to a
percentage (or relative) change in X.
 Lin-Log models
To measure the absolute change in the regressand for a
percentage change in the regressor, we will estimate the
following model:

Slope coefficient:

A change in the log of a number is a relative change, or

percentage change.
 Lin-Log models
Letting denote a small change, we can write

or,
 Lin-Log models
It explains that the absolute change in Y is equal to slope times the
relative change in X. Thus, if changes by 0.01 unit (or 1%), the absolute
change in Y is 0.01().
If in an application one finds , the absolute change in Y is (0.01)(200) = 2.
Note:
when we estimate the above equation do not forget to multiply the
value of the estimated slope coefficient by 0.01 or (what amounts to the
same thing) divide it by 100.
If this procedure not followed, may be conclusions from results are
misleading.
 Lin-Log models
The Lin-Log model has been used in Engel expenditure
functions, named after the German statistician Ernst Engel
(1821–1896).
Engel expenditure functions
“The total expenditure that is devoted to food tends to
increase in arithmetic progression as total expenditure
increases in geometric proportion”.
Another way of expressing this is that the share of expenditure
on food decreases as total expenditure increases.
 Lin-Log models
Example:
Data: USA households
Coverage: 869 US households
Period: 1995
Variables:
Total House Holds Expenditure (Expend) (measured in US$)
House Holds Expenditure on food (𝐅𝐃𝐇𝐎) (measured in US$)
 Lin-Log models
Class activity-5.3
 Download data from file Table 2.8 from LMS
 Import data to EViews
 Estimate the following regression model

 Save the results for discussion

 Interpret the results of model
 Lin-Log models
Results: Dependent Variable: SFDHO
Method: Least Squares
Date: 02/28/23 Time: 13:42
 
 
 
 
 
 
Sample: 1 869      
Included observations: 869    
         
         
Variable Coefficient Std. Error t-Statistic Prob.  
         
         
C 0.930387 0.036367 25.58359 0.0000
LNEXPEND -0.077737 0.003591 -21.64822 0.0000
         
         
R-squared 0.350876    Mean dependent var 0.144736
Adjusted R-squared 0.350127    S.D. dependent var 0.085283
S.E. of regression 0.068750    Akaike info criterion -2.514368
Sum squared resid 4.097984    Schwarz criterion -2.503396
Log likelihood 1094.493    Hannan-Quinn criter. -2.510170
F-statistic 468.6456    Durbin-Watson stat 1.968386
Prob(F-statistic) 0.000000      
         
         
 Lin-Log models
Interpretation of results
➢ Statistical Significance?
➢ Overall Statistical significance?
➢ R2 Value?
➢ Interpretation of parameters?

All the estimated coefficients are individually highly statistically

significant.
 Lin-Log models
Interpretation of slope coefficient
If total expenditure increases by 1%, on average, the share of
expenditure on food goes down by about 0.0008 units, thus
supporting the Engel hypothesis.
Alternatively, If total expenditure increases by 100%, on
average, the share of expenditure on food and nonalcoholic
beverages goes down by about 0.08 units.
Note: Do not forget to divide the slope coefficient by 100.
 Lin-Log models
Graph of SFDHO and Log(Expend) Graph of SFDHO and Expend
 Reciprocal models
Sometimes we come across situations where the relationship
between the regressand and regressor(s) is reciprocal or
inverse, such as:

 This model is nonlinear in X but it is linear in parameters.

 As X increases indefinitely, the term approaches zero and Y
approaches the limiting or asymptotic value .
 Reciprocal models
The slope is

 Therefore, if is positive, the slope is negative throughout,

and if is negative, the slope is positive throughout.
 This model does not tells more than just showing the
inverse relationship.
 Reciprocal models
Example:
Data: USA households
Coverage: 869 US households
Period: 1995
Variables:
Total House Holds Expenditure (Expend) (measured in US$)
House Holds Expenditure on food (𝐅𝐃𝐇𝐎) (measured in US$)
 Reciprocal models
Class activity-5.4
 Use the Downloaded data file Table 2.8 from LMS
 Estimate the following regression model

 Save the results for discussion

 Interpret the results of model
 Reciprocal models
Results Dependent Variable: SFDHO
Method: Least Squares
Date: 03/04/23 Time: 19:34
 
 
 
 
 
 
Sample: 1 869      
Included observations: 869    
         
         
Variable Coefficient Std. Error t-Statistic Prob.  
         
         
C 0.077263 0.004012 19.25950 0.0000
RECIPROCALEXPEND 1331.338 63.95713 20.81610 0.0000
         
         
R-squared 0.333236    Mean dependent var 0.144736
Adjusted R-squared 0.332467    S.D. dependent var 0.085283
S.E. of regression 0.069678    Akaike info criterion -2.487556
Sum squared resid 4.209346    Schwarz criterion -2.476584
Log likelihood 1082.843    Hannan-Quinn criter. -2.483357
F-statistic 433.3100    Durbin-Watson stat 1.997990
Prob(F-statistic) 0.000000      
         
         
 Reciprocal models
Interpretation of results
➢ Statistical Significance?
➢ Overall Statistical significance?
➢ R2 Value?
➢ Interpretation of parameters?
All the estimated coefficients are individually highly statistically
significant.
The slope coefficient is positive, suggesting that the rate of change
of SFDHO with respect to total expenditure will be negative
throughout.
 form
 The practical problem in doing empirical work is to
decide on the functional form of the regression model
that may be appropriate in a given situation.
 In the two-variable regression model this choice is very
often not difficult because we can always plot the
regressand and the (single) regressor and visually decide
the functional form.
 But when it comes to the multiple regression models
this choice is not easy, for it is difficult to draw a multi-
dimensional plot.
 form
In practice, therefore, we need to know the properties of
the models we have discussed.
One way of accomplishing this is to consider the slope
and the elasticity coefficients of the various models.
If there is more than one regressor in the model, one can
compute the partial slope and partial elasticity
coefficients, holding other variables in the model
constant.
 form
Few Useful Tips
 When a variable is in linear form, its coefficient will show changes in unit
… i.e., it changes in absolute terms
 If a variable is log/ln form, its coefficient will show changes in percentage
...i.e., it changes in relative terms
 To find slope of the regression model we have to take the derivate of the
model with respect to that variable of interest or a partial derivative if
more than one explanatory variables in model. (slope is change in
dependent variable w.r.t change in one of the independent variable)
 To find elasticities or partial elasticities one have to multiply the value of
the “slope” of regression (obtain after the derivate of the regression)
with X/Y.
 form
Models we have studied
1. Linear model
2. Log-Linear model
3. Log-Lin model
4. Lin-Log model
5. Reciprocal model
 form
Linear model
To find slope differentiate the model with respect to X

To find elasticity multiply by

 form
Log-Linear model
To find slope differentiate the model with respect to X

To find elasticity multiply by

 form
Log-Lin model
To find slope differentiate the model with respect to X

To find elasticity multiply by

 form
Lin-Log model
To find slope differentiate the model with respect to X

To find elasticity multiply by

 form
Reciprocal model
To find slope differentiate the model with respect to X

To find elasticity multiply by

 form
MODEL FORM SLOPE () ELASTICITY ()

LINEAR

LOG-LINEAR

LOG-LIN

LIN-LOG

RECIPROCAL