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Abstract

The methods of autocorrelation, muticolinearity and hyteskedastisity are one of the basic
econometric techniques in the process of economic forecast. We take in consideration
two economic variables in the name of consumption and GDP in China. There were
included 30 observations in the period between 1979 and 2009. The results from E-view
testing show existence both for autocorrelation and hyteroskedastisity
Table of content
1. Introduction………………………………………………………………………..3
2. Literature Review……………………………………………………………….....4
3. Empirical Results……………………………………………………………….....6
4. Conclusion………………………………………………………………………...8
5. References…………………………….…………………………………………..9

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Introduction

The China is one of the most interesting counties for economies in last 20 years. This
country from one of the poorest became one of the major players in world economy. With
the second highest GDP , China today is only behind US. The GDP and consumption are
increasing constantly every day and figures shows that on year level, China economy is
the fastest developing. In this paper is presented short survey about relation between GDP
and consumption in the period from 1979 to 2009 (Cheng and Feng, 2000)

Several different tests are employed in the researching process. First is composed one
linear model. After this OLS model was tested for existence for autocorr
elation and multicolinearity. In the process of testing was used one of the most popular
econometric software E-view 5.0.

Paper is separated on three parts. In first was discussed about main literature concepts for
GDP and consumption. Second part is presentation of empirical results, with several tests
for autocorrelation, heteroskedasticity and structural breaks. In last sector are presented
several conclusions about research.

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Literature Review

I mention previous in introducing in this research will be include two variables in the
name of consumption and GDP in China in the period between 1969 and 2009. In last 20
year China is probably of the fastest growing industries in the world. According to
Spence, (1991) China with its 1.2 billion of people composed one of the greatest and
most rabidly developing markets and economies in the world. This country has the
greatest consumption potential for this century. The dates showed that in the period of 30
years gross consumption in the country increase almost for 20 times (Starr, 2001). Huge
increase in consumption power of the country is attractive for many economists to
research that power in correlation with other economic variables (Ma, 2006).

The greatest part of academic and economist also investigate the GDP growth in China in
last 15 years. Why they choused this particular country for research? The answer is pretty
simple. Chinese economy is the fastest growing economies at the moment. With third
place on the ranking for countries China take the second place only behind the USA.
According to Holz, (2006) in the period from 1992 to 1996 the GDP in China increased
for amazing 12 percent. Many big companies like Apple, Nokia, and Mercedes move
production in this country because of low labor costs. One of the top managers in
Goldman Sachs Group, Jim O’Neill said that according his opinion China in 2027 will
overtake U.S. on the first place of most developed countries.

One of the most popular econometrics techniques in the process of research for possible
relation between consumption and GDP are methods of cointegration analysis and
causality. Many authors try to find causality between these variables in the case of China.
One research on this topic is presented in one paper whether authors in the period from
1978 to 2000. Han et.al (2004) investigated relationship between energy consumption
and GDP in China. In their paper authors used popular test for cointegration and
causality. Authors based on results from dates of China energy consumption and GDP,

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conclude that there is bi-directional (causality) between two variables include in
research , but no cointegration.

Previous on this section were explained two variables that will be used in our short
survey related with Chinese economy in last 30 years. In this short research will be used
some of the basic econometric techniques. First will be employed ordinary least squares
(OLS) method. We choused this method because is the most popular in the filed of
economic researches. OLS is using for estimating the unknown parameters in a linear
regression model (Gurajati, 1988)

The name for the term heteroscedastisity origin form Greek word “hetero” that means
different and “skedasis” which means dispersion. This term is one of the most used terms
in modern econometric. Accorind to Brooks, (2002) if one random variable has different
variance through the time, it means that variable is heteroscedastic. This technique is
used almost in all econometric researches. If we are using some econometric techniques
like ordinary least squares, one of the most important assumptions proposed standard
variance on the error term. In the case when we are observing cross-sectional or time
series dates, error term could vary across the time , it means that time series has
heteroscedastic problems (Gurajati, 2009). The theory offers several different test for this
issues like: Park test, Glejser test, Breusch Test and probably the most used White test.

Other effects that is common for almost every statistic research is multicollinearity. This
is the second techniques that will be used in our analysis today. According to Madala,
(2006) multicollinearity is econometric phenomenon whether two or more variables are
correlated. One of the problems when dates are correlated comes from sensitivity on
small changes in model. Good things related with multicollineary is that this phenomenon
does not decrease predictive power on the whole model, rather then isolate predictive
power on individual predictors. The model with correlated predictors is valid only we
observe the entire model outcomes, but if we want to watch variables separately then we
are losing reliability of results (Brooks, 2002) .The extensive theory on the issues about

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multicollinearity offers several indicators for recognition of multicollinearity like
insignificant regression coefficient and huge sensitivity on regression coefficient when
one variable is added or deleted. Also some test are developed in order the process of
multicollinearity recognition, for example Condition Number Test, Farrar-Glauber test
and the test that will be used in our survey Durbin-Watson test.

Empirical analysis

In previous sector I offered short explanation about type of variables that are used in this
research. Two variables include are consumption and GDP in China in the period from
1979 to 2009. Historically in last 15 years China is the fastest growing industry or
economy in the world. In testing process are include time series dates, with 30
observation. The dates are taken from official web site of World Bank1. This research is
composed by three steps. First is make regression in E-view, and final result output one
OLS model. After this step were employed 2 different econometric techniques in order to
test about autocorellation and hyteroscedastisity in dates.

Dependent Variable: GDP


Method: Least Squares
Date: 01/20/11 Time: 16:51
Sample (adjusted): 1979 2008
Included observations: 30 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

C(1) -183963.6 41640.79 -4.417870 0.0001


CSS 2.131004 0.055096 38.67787 0.0000

R-squared 0.981627 Mean dependent var 1016271.


Adjusted R-squared 0.980971 S.D. dependent var 1102497.
S.E. of regression 152085.2 Akaike info criterion 26.76661
Sum squared resid 6.48E+11 Schwarz criterion 26.86002
Log likelihood -399.4992 Durbin-Watson stat 0.838648

1
http://www.worldbank.org/

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This table presented the results obtain from OLS, whether GDP is taken like Dependent
variable. Results from this table are important for several reasons. First from this calculation we
can draw several conclusions related with variables included in our research and also composed
one OLS model:

GDP = 183963.5884 + 2.131003611*CSS + u

Another this important result is level of R-squared. In our case R-squared is very high; it
means that regression line almost perfect fit the dates. In order only to prove reliably of R-
squared also is presented adjusted version, and result is almost the same.

This research asked us to check about existence of autocorellation of dates. One test
was employed for this issue called Durbin- Watson. The t-critical value at 5% level of significance
is from 1.35 to 1.49. In this case D-W stat. is equal to 0.8 and show the existence of negative
autocorrelation.

White Heteroskedasticity Test:

F-statistic 5.531410 Probability 0.009697


Obs*R-squared 8.719391 Probability 0.012782

We chose to employ the White test in order to check existence of heteroskedasticity. The
result shows that these dates have problem with heteroskedasticity because f-stat. is higher then
statistical value. One last thing was check on the end, related with structural breaks. The Chow
test was used and result is logic and says that dates have no structural breaks through this period
of time.

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Conclusion

GDP is probably the best economic indicator for one country. Level of this variable often
is used like represent of whole country economy and gives direction about the future of
the country. In this paper was presented relation of GDP and consumption like second
economic variable. I chouse OLS like most appropriate model for this type of analysis
because according to most of economics this techniques has greatest predictive power.
The test unfortunately shows the existence both of autocorrelation between variables and
hyterockedastisity. There is no structural break, but is only small good things and
something logical in case of China.

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References

Brooks, C. (2002) Introductory Econometrics for Finance. Cambridge, UK: Cambridge


University Press.

Chen, B. and Feng, F. (2000). "Determinants of economic growth in China: Private


enterprise, education, and openness". China Economic Review, vol.11 pp. 1–15.

Gujarathi, D.N. (1988), Econometrics. McGraw-Hill, New York

Han Z.,Wei Y.,Jiao J.,Fan Y.,Zhang J., (2004) On the Cointegration and Causality
between Chinese GDP and Energy Consumption. Institute of Policy and
Management, Beijing vol.17, pp.200-220

Ma, W.,Wang X. and LI, J., (2006) Empirical Analysis of Energy Consumption and
Economic Development in China[J];Commercial Research vol.16 , pp.22-80

Maddala, G. S., (2006) Introduction to Econometrics. 3rd Edition. New York, Wiley

Spence, J. D. (1991). The Search for Modern China. WW Norton & Company publishing

Starr, J. (2001). Understanding China: A Guide to China's Economy, History, and


Political Culture. Economic Review, vol.22, pp.150-196