Suggested Answers to ECON2170(001) Homework assignment # 1: (Refers to Student Solutions Manual for Use with Basic Econometrics, Gujarati(2003))

2.2 PRF: Yi = 1 + 2 X i + u i SRF: Yi = 1 + 2 X and u i = Yi Yi or Yi = Yi + u i The SRF is an estimator of the PRF. In most situations we have a sample of observations from a given population and we try to learn something about the population from a given sample. A regression model try to explain the relationship between the Y and X variables, however, the simple regression can never be a completely accurate description of reality. Therefore, there is bound to be some difference between the actual values of the dependent variable and its values estimated from the chosen regression model. Thus the error term u can be treated as the other factors that are not captured (other than the X variable) in the regression to explain the independent variable. And the residual u can be treated as the estimated values apart from the actual values.

2.3

2.15

(b) As total expenditure increases, on the average, expenditure on food also increase. But there is greater variability between the two variables after the total expenditure exceeds the level of 600. (c.) We would not expect the expenditure on food to increase linearly (i.e., in a straight line fashion) for ever. Once basic needs are satisfied, people will spend relatively less on food as their income increases. At the higher levels of income (over 600), consumers will have a more variability behavior on food expenditure.
3.9 For the normal SRF: Yi = 1 + 2 X and Yi = 1 + 2 ( X X )

(a) 1 = Y 2 X

and 1 = Y 2 ( X X ) = Y 2

( X X ) = Y =0
n

Because

xy where x, and y are the deviation form (i.e., (X- ) and (Y- ).) (b) The 2 = X Y x2
Therefore for the second model: Yi = 1 + 2 ( X i X ) + u i Let x = (X- X ) and
( X X ) ( X X ) =

x = 0

( X X ) = x =0
n xy
2
2

From the formula: 2 =

2

xy
2

And the

x X var( ) = nx
2 1 2

xy x
2

x x var( ) = = n n x
2 1 2

= 2 =

2 2 2 var( 2 ) = var( 2 ) = = And = x 2 ( x x ) 2 x 2

(c.) Model II may be easier to use when the values of X are large numbers, but now with high speed computers this is no longer a problem. Therefore model I and II are basically the same.

3.10 Since xi = y i = 0 , that is the sum of the deviations from mean value is

always zero (i.e., x = y = 0 ). Therefore, 2 =

3.21

( x x )( y y )
2

( x x )

xy x
2

Original 1110 1700 205500 322000 data Revised 1110 1680 204200 315400 data Therefore, the corrected coefficient of correlation is
R2 = [ n X ( X ) 2 ][ nY 2 (Y ) 2 ]
2

Yi

2 i

132100 133300

n XY X Y

= 0.9688

Since the revised values of Y are separated larger than the old data, therefore it reduces the goodness of fit (i.e. the R2 is reduced). 3.22. (a) Generally, the three series have moved upward; in the case of gold price there is considerable volatility.

(b) If the hypothesis were true, we would expect 2 1 . (c )

The slope coefficient in the gold price equation is not statistically significant. (Because the t-value is less than 2.)

It seems the stock market is a better hedge against inflation than gold.

* 5.3 (a) use the formula: t =

2 0 to obtained the missing figures. se ( 2 )

(b) On average, mean hourly wage goes up by about 72 cents (or 0.724 units of wage) for an additional year of schooling. (c) Since the t-value of 2 is 8.67 which is great than the critical tc(0.025, 11) = 2.201, therefore, you can reject the null hypothesis that there is zero effect of education on wages. (d) ANOVA table can be set up by using the information from the estimated results as SS df MSS 2 2 Regression (ESS) k-1 ESS/(k-1) R y =2-1 =95.415 0.9077*105.118 =95.415 Residuals (RSS) n-k RSS/(n-k) (1 R 2 )y 2 or =13-2=11 =0.88116 RSS= 9.692810 2 TSS n-1=13-1=12 y =105.118 2 2 Since y 2 can be obtained by y = (n 1) y =105.118 and y =2.959706 which can be obtained from the S.D. dependent var from the EVIEWS output. (e) The R2 is related to the F-value and also related to the t-value of 2 The formula are 2 t2 R 2 /( k 1) (k 1) F 2 R2 = 2 F= => R = and (n k ) + (k 1) F (1 R 2 ) /( n k ) t + (n 2)
2

5.8 (a) There is positive association in the LFPR in 1972 related to the LFPR in 1968, The estimated result indicates one unit rate increase in 1968 will lead about 0.65 unit of rate in 1972 which is not surprising in view of the fact since WWII there has been a steady increase in the LFPR of women.) (b) Use the one-tail t-test: Set up the hypothesis as: H0: 2 = 1 and H1: 2 > 1 1 0.6560 1 * = 1.7542 The compute t-value is t = 2 = 0.1961 se ( 2 ) Compare to the critical tc(0.05. 17) = 1.740, so the absolute compute t-value is greater than the t-value at 5% of significant level, therefore, reject the null hypothesis. (c) The mean LFPR is: 0.2033+0.6560(0.58) 0.5838. The 95% Confident interval is: 0.5838 2.11*Se(mean of forecast value) Where the critical t-value is 2.11. (d) Without the actual data given in the question, therefore it is difficult to calculate and test the error term is normally distributed or not. 5.16 (a) If the PPP theory holds, one would expect the intercept to be zero and the slope to be one. (b)

Set up the hypothesis as: H0: 2 = 1 and H1: 2 1 Since the t-value is greater than critical tc(0.025, 28) = 2.048 Therefore, you can reject the null hypothesis. The intercept is statistically insignificant so that it is believed to be zero. (c) Since the Big Mac index is crude and hilarious to begin with, it probably doesnt matter. However, for the sample data, the results do not support the PPP theory.

5.17(a)

(b)

The Jarque-Bera is 0.9721 with a p-value of 0.615. Therefore, asymptotically cannot be rejected the normality assumption. 1 0.714 1 = 6.36 . (c ) The compute t-value is: t = 2 = 0.045 se ( 2 ) The critical tc(0.025, 22) = 2.074. Therefore, the absolute t-value is greater than the critical t, so reject the null hypothesis that 2 = 1 . (d) ANOVA table can be set up by using the information from the estimated results as SS df MSS 2 2 Regression (ESS) k-1 ESS/(k-1) R y =2-1 =984.20 0.918114*1071.98 =984.20 Residuals (RSS) n-k RSS/(n-k) (1 R 2 )y 2 or =24-2=22 =3.990 RSS= 87.782 2 TSS n-1=24-1=23 y =1071.98 2 2 Since y 2 can be obtained by y = (n 1) y =23*6.8272 = 1071.98 and y =6.827 which can be obtained from the S.D. dependent var from the EVIEWS output.