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Assignment No 2: Econometric Methods-1

by Nayar Rafique

Part (a)
Regression1

Variable

Coefficient

Std. Error

t-Statistic

Prob.

C
LOG(GASP)*UPTO73
LOG(GASP)*AFTER7
3
LOG(PCINCOME)
T

-13.80498
-0.199495

1.501225
0.053313

-9.195805
-3.741945

0.0000
0.0005

-0.180645
1.711565
-0.018393

0.043684
0.161474
0.003892

-4.135297
10.59963
-4.725682

0.0001
0.0000
0.0000

R-squared
0.964901

F-statistic
323.0136

Prob(F-statistic)
0.000000

Part (b):
Regression 2:

Variable

Coefficient

Std. Error

t-Statistic

Prob.

C
LOG(GASP)
LOG(GASP)*AFTER7
3
LOG(PCINCOME)
T

-13.80498
-0.199495

1.501225
0.053313

-9.195805
-3.741945

0.0000
0.0005

0.018851
1.711565
-0.018393

0.012373
0.161474
0.003892

1.523546
10.59963
-4.725682

0.1343
0.0000
0.0000

R-squared
0.964901

F-statistic
323.0136

Prob(F-statistic)
0.000000

The regressions are the same except for the transformation of the price coefficients. We can obtain the
second model from the first. The coefficient on log (GasP) in second regression is the same like the

coefficient of Log (Gasp) * Upto73 in the first regression. The coefficient of Log (GasP) * After73 in
the second is Log (GasP) * After73 Log (Gasp) * Upto73 in the first.
i.e.

The coefficient on After73 in the second model shows the overall change from before 73 to after 73,
while that on After73 in the first shows the change exactly after 73.
If we put Upto73=0 and After73=1 in regression 1 then we have the same results as regression2.
Step1:
Put Upto73=1 and After73=0 in regression 1, then we have:
LOG(G)=-13.80-1.99LOG(GASP)+1.71LOG(PCINCOME)-0.018T

..

(1)
Put Upto73=0 and After73=1 in regression 1, then we have:
LOG(G)=-13.80-0.181LOG(GASP)+1.71LOG(PCINCOME)-0.018T

..(2)

Step2:
Put After73=0 in regression 2, then we have:
LOG(G)=-13.80-1.99LOG(GASP)+1.71LOG(PCINCOME)-0.018T

..

(3)
Put After73=1 in regression 2, then we have:
LOG(G)=-13.80-0.181LOG(GASP)+1.71LOG(PCINCOME)-0.018T

..(4)

From (2) and (4) it is clear that we can have regression 2 from regression 1.
Interpretation of Model in term of Quantity and Price:

This model explains that on whole one percent increase in Gas Price will cause a negative effect on
demand and reduce the demand by 0.199 percent. While One percent increase in the Gas Price after 73
causes (0.199 -0.0188) percent decrease in the demand for gasoline.

Part (C): We now examine whether the three aggregate price indexes, PD = durables price, PN =
nondurables price, PS = services price, are significant explanatory variables in the equation. Add
logPD, logPN and logPS to your regression in part b. Report the results. Now, test the hypothesis that
the coefficients on the three variables are all zero. Use an F test and a Wald test.
Hypothesis test: To check whether the coefficients of LogPD, LogPS and LogPN are all zeros, we use
F-Test here.
Unrestricted Model:

Variable

Coefficient

Std. Error

t-Statistic

Prob.

C
LOG(GASP)
LOG(GASP)*AFTER7
3
LOG(PCINCOME)
LOGPD
LOGPS
LOGPN
T

-10.80655
0.009465

1.353437
0.061511

-7.984522
0.153869

0.0000
0.8784

0.018369
1.438225
0.596163
-0.659137
-0.412212
0.013286

0.013989
0.144463
0.190072
0.320352
0.311166
0.008228

1.313151
9.955663
3.136513
-2.057544
-1.324733
1.614758

0.1959
0.0000
0.0030
0.0456
0.1921
0.1135

284.8298

284.8298

R-squared
Prob(F-statistic)

0.978408 F-statistic
F-statistic
0.000000

Residual Sum of Square for Un-Restricted Model =


Restricted model:
Here we impose three restrictions by excluding LogPD, LogPS, and LogPN, so our restricted model is
now:

Variable

Coefficient

Std. Error

t-Statistic

Prob.

C
LOG(GASP)
LOG(GASP)*AFTER7
3
LOG(PCINCOME)
T

-13.80498
-0.199495

1.501225
0.053313

-9.195805
-3.741945

0.0000
0.0005

0.018851
1.711565
-0.018393

0.012373
0.161474
0.003892

1.523546
10.59963
-4.725682

0.1343
0.0000
0.0000

R-squared
0.964901

F-statistic
323.0136

Prob(F-statistic)
0.000000

Residual Sum of Square for Restricted Model =


F=Test: We apply F-test here to check whether LogPD, LogPS, and LogPN are all zero or not:

No, of regressors

No, of restrictions =

No, of observations =

52

Critical value of F (3, 44):


@ 1 % Probability level = 4.2606 So, H0 is rejected as

Fest > 4.2606

@ 5 % Probability level = 2.816.

So, H0 is rejected as

Fest > 2.816

@ 10 % Probability level = 2.212. So, H0 is rejected as

Fest > 2.212

From above estimation it is clear that LogPD, LogPS, LogPN are all not zero and are statistically
significant in the model