The co-interaction of consumption and income

Statement of the Problem

This paper studies the co-interaction of consumption and income. But the
consumption expenditure is a complex matter. It depends on the income. If
income increases in a dollar, consumption increases by a fraction of a dollar. This
fraction is the marginal propensity to consume on the simplest ways to express
such a relation of dependency is as a linear function:
C=a+bY
Where C is the consumption expenditure, Y is the national income
and "a" and "b" is constant.
In this paper, we will consider a relation between the consumption and the income.
Moreover this paper will use an econometric method to estimate parameters in the
model, apply some test to verify the result we acquire and then conclude the model.

General model:

Ct=β1+β2YDt+εt

Where:
Ct( G C ) = C o n s u m p t i o n E x p e n d i t u r e

YDt(GYD)= Income

Before some testing process we have to establish random walks model because
regressing one random walk against another can lead to spurious results in that
conventional significance tests will tend to indicate a relationship between the two
variables when in fact none exists. This is one reason why it is important to test for
random walks. If a test fails to reject the hypothesis of a random walk, one can
difference the series question before using it in regression. Since many economic
time series seem to follow random walks, this suggests that one will typically want to
difference a variable before using it in regression. While this is acceptable,
differencing may result in a loss of information about the long- run relationship
between t w o variables

Data sources and description

Due to time and scope, quarterly time series data from 1954.1 to 1995.21

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 The co-interaction of consumption and income

There are 166 observation. The data has been collected from sheet. In addition with

this purpose the book of (i) Econometric models and Economic forecast ( by- Robert

S. pindyck and Doniel L.), fourth edition, (ii) Basic Econometrics. Domandar N.

Gujrati. fourth edition, have been used. . After analysis the result, I'll attach a copy

of data.

Descriptive statistics of each variable:

Date:
11/15/09
Time: 12:22
Sample: 1954:1 1995:2

GC GYD

Mean 1578.775 1726.075

Median 950.4500 1071.650
Maximum 4851.029 5201.000
Minimum 236.4000 258.6000
Std. Dev. 1388.838 1496.928
Skewness 0.878114 0.838759
Kurtosis 2.424395 2.350241

Jarque-Bera 23.62498 22.38407

Probability 0.000007 0.000014

Observation 166 166

s

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 The co-interaction of consumption and income

GYD

Model Estimation

For the model estimation, we will do some test about the co- integration of
consumption and income. Now we apply the least square method for the ADF test
and output is show below:

ADF Test Statistic 9.62325 1% Critical -3.4713

6 Value*
5% Critical Value -2.8791
10% Critical Value -2.5760
*MacKinnon critical values for rejection of hypothesis of a
unit root.

Augmented Dickey-Fuller Test Equation

Dependent Variable: D(GC)
Method: Least Squares
Date: 11/15/09 Time: 13:01
Sample(adjusted): 1954:3 1995:2
Included observations: 164 after adjusting endpoints
Variable Coefficie Std. Error t-Statistic Prob.
nt
GC(-1) 0.01404 0.001459 9.623256 0.0000
4
D(GC(-1)) 0.02290 0.079927 0.286596 0.7748

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 The co-interaction of consumption and income

7
C 5.47964 1.914002 2.862926 0.0048
6
R-squared 0.61358 Mean dependent 28.1215
5 var 2
Adjusted R- 0.60878 S.D. dependent 25.1343
squared 5 var 5
S.E. of regression 15.7208 Akaike info 8.36597
3 criterion 3
Sum squared 39790.2 Schwarz criterion 8.42267
resid 6 8
Log likelihood - F-statistic 127.825
683.009 3
8
Durbin-Watson 2.01185 Prob(F-statistic) 0.00000
stat 4 0

ADF Test Statistic 9.69260 1% Critical -3.4713

2 Value*
5% Critical Value -2.8791
10% Critical Value -2.5760
*MacKinnon critical values for rejection of hypothesis of a
unit root.

Augmented Dickey-Fuller Test Equation

Dependent Variable: D(GYD)
Method: Least Squares
Date: 11/15/09 Time: 13:04
Sample(adjusted): 1954:3 1995:2
Included observations: 164 after adjusting endpoints
Variable Coefficie Std. Error t-Statistic Prob.
nt
GYD(-1) 0.01597 0.001648 9.692602 0.0000
7
D(GYD(-1)) - 0.080974 -1.946904 0.0533
0.15764
8
C 7.48921 2.671796 2.803062 0.0057
0
R-squared 0.46843 Mean dependent 30.1365
7 var 9
Adjusted R- 0.46183 S.D. dependent 29.9847
squared 4 var 9
S.E. of regression 21.9967 Akaike info 9.03779
8 criterion 2
Sum squared 77901.1 Schwarz criterion 9.09449
resid 6 7
Log likelihood - F-statistic 70.9403

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 The co-interaction of consumption and income

738.099 1
0
Durbin-Watson 1.91288 Prob(F-statistic) 0.00000
stat 6 0

Vector Error Correction Estimates:

Date: 11/15/09 Time: 13:16

Sample(adjusted): 1954:4 1995:2
Included observations: 163 after
adjusting
endpoints
Standard errors & t-statistics in
parentheses
Cointegrating CointEq1
Eq:
D(GC(-1)) 1.000000

D(GYD(-1)) -0.949584
(0.03716)
(-25.5512)

C 0.825001
Error D(GC,2) D(GYD,2)
Correction:
CointEq1 -0.480847 1.265850
(0.11620) (0.12944)
(-4.13802) (9.77945)

D(GC(-1),2) -0.338085 -0.242504

(0.09645) (0.10744)
(-3.50512) (-2.25706)

D(GYD(-1),2) -0.278621 -0.053315

(0.06086) (0.06779)
(-4.57800) (-0.78643)

C 0.643335 0.181223
(1.26298) (1.40686)
(0.50938) (0.12881)
R-squared 0.461454 0.710258
Adj. R- 0.451293 0.704791
squared
Sum sq. 41319.57 51269.99
resids
S.E. equation 16.12053 17.95697

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 The co-interaction of consumption and income

F-statistic 45.41319 129.9214

Log likelihood -682.4173 -700.0025
Akaike AIC 8.422298 8.638068
Schwarz SC 8.498218 8.713988
Mean 0.408840 0.087730
dependent
S.D. 21.76252 33.04977
dependent
Determinant Residual 72079.53
Covariance
Log Likelihood -1374.194
Akaike Information 16.98398
Criteria
Schwarz Criteria 17.17378

Result and conclusion

We have tested whether real consumption spending and real income are co-
integrated, using quarterly data from 1954:1 to 1952:2. we first test whether each
variable is a random walk using the augmented Dickey-Fuller test. Running this test,
first for consumption and then for the income and case include logs for the change in
the variable, always yields test statistics that fail to reject the random walk h
Hypothesis. Next run a co-integrated regression of consumption C against income
from the Durbin-Watson statistics. We can see it value and comparing the critical
value. We can reject the hypothesis at a random walk at the 5% level. Running a
Dickey-Fuller test on the residuals of the regression also leads to a rejection of the
random walk hypothesis at the 5% level.

Limitation of the study and possible extension

There is no limitation on getting the essential data and information. The data which

are collected, I have assumed the all information true and collected. I have some

limitation from the span of time, besides I did not get enough facility to use EVIEWs

program for me. Notwithstanding these limitations, it is expected that it will also

contribute in a merger to have better under standing of the condition of the single

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 The co-interaction of consumption and income

equation model.

Acknowledgement

I am grateful to our beloved professor Dr. Bangorn Tubtimtong for his

contribution and his moral assistance.

References.

1.Damonder N. Gujarati , Basic Econometrics, McGraw-Hill, fourth edition.

2. Robert S Pindyck and Daniel L Rubinfeld, Econometric model and forecast

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The co-interaction of consumption and income

Appendix

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The co-interaction of consumption and income

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The co-interaction of consumption and income

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The co-interaction of consumption and income