Office Use Only

Monash University
Semester One 2008 Examination Period
Faculty of Business and Economics

EXAM CODES:

ETC1000 / ETC9000 / ETW1000

TITLE OF PAPER:

Business and Economic Statistics

EXAM DURATION:

2 hours writing time

READING TIME:

10 minutes

THIS PAPER IS FOR STUDENTS STUDYING AT:( tick where applicable)

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INSTRUCTIONS TO CANDIDATES
Answer ALL questions in this examination paper
Paper is worth 100 marks in total

Page 1 of 10

INSTRUCTIONS TO CANDIDATES
Answer ALL questions in this examination paper
Paper is worth 100 marks in total

Background
As an international economist advising Australias Minister for Trade, you are interested in why
Australia trades more with certain countries and not others. You have data on how much trade takes
place between Australia and various other countries around the globe, and wish to analyse it.

Preliminary (Descriptive) Analysis

(1) You first want to get a feel for how important individual countries are for Australias exports.
Using 2005 data on the amount of trade from Australia to a number of its trading partners ($AU
billion), you obtain the following summary statistics:

Trade ($ billion)
Mean
Standard Error
Median
Mode
Standard Deviation
Sample Variance
Kurtosis
Skewness
Range
Minimum
Maximum
Sum
Count

205.1348
45.6170
13.4438
3.0797
618.7793
382,887.7697
30.8781
5.1089
5,222.6093
0.0007
5,222.6100
37,744.7985
184.0000

What do you learn about the volume of trade from Australia to the countries in the sample? Be
sure to interpret all the relevant summary statistics in the output.
(6 marks)

Page 2 of 10

(2) Next you use Excel to run a regression of trade volume on a variable taking a value of 1 for all
observations.

SUMMARY OUTPUT
Regression Statistics
Multiple R
0.315447
R Square
0.099507
Adjusted R Square
0.094043
Standard Error
618.7793
Observations
184
ANOVA
df
Regression
Residual
Total

Intercept
X

1
183
184

SS
MS
F
Significance F
7742771 7742771 20.22204
1.23E-05
70068462 382887.8
77811233

Coefficients Standard Error

t Stat
P-value
0
#N/A
#N/A
#N/A
205.1348
45.61701 4.496892 1.22E-05

Lower 95%
Upper 95%
#N/A
#N/A
115.1319
295.1377

(a) How does the estimated coefficient for the X variable in this regression relate to your
summary statistics in (1)? Interpret the value of this coefficient.
(3 marks)
(b) What do the 95% Confidence Lower and 95% Confidence Upper values for the X
variable tell us? Interpret these values.
(4 marks)

Exploring some Relationships in the Data

(3) You are interested in whether Australia trades more with countries that it has a trade agreement
with. You split your data into 2 groups: those which have a trade agreement with Australia, and
those which dont. Below is a summary of the data you obtain.

Trade Volume
($ billion)
Less than 100
100-400
More than 400
Total

Agreement
127
20
17
164

No Agreement
15
3
3
21

Total
142
23
20
185

(a) What is the probability a randomly selected country has a trade agreement with Australia?
(2 marks)
(b) What proportion of countries traded up to $400 billion with Australia?
(2 marks)
Page 3 of 10

(c) What is the probability that a randomly selected country which has a trade agreement with
Australia traded between $100 and $400 billion, inclusive?
(3 marks)
(d) What is the probability that a randomly selected country traded between $100 and $400
billion, inclusive, and had a trade agreement with Australia?
(3 marks)
(e) Check whether trade volume is independent of having a trade agreement.
(3 marks)

(4) You next construct the following variables:

TRADE

Amount of trade from Australia to the particular partner country in

$AU billion

AGREEMENT

1 if Australia and the partner country have a trade agreement;

0 otherwise

and regress TRADE on a constant and AGREEMENT. Below is the output.

SUMMARY OUTPUT
Regression Statistics
Multiple R
0.1647
R Square
0.027126
Adjusted R Square
0.021781
Standard Error
612.0035
Observations
184
ANOVA
df
Regression
Residual
Total

Intercept
Agreement

1
182
183

SS
MS
F
Significance F
1900678 1900678 5.074589
0.025473
68167783 374548.3
70068462

Coefficients Standard Error

t Stat
P-value
Lower 95% Upper 95%
165.7715
48.38312 3.426226 0.000757
70.30755 261.2355
301.785
133.9668 2.252685 0.025473
37.45723 566.1127

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(a) Give a point prediction for the amount of trade that takes place between Australia and a
country WITHOUT a trade agreement.
(2 marks)
(b) Give a point prediction for the amount of trade that takes place between Australia and a
country WITH a trade agreement.
(2 marks)
(c) Perform a test to determine whether there is a difference in mean trade volume depending
on whether the country has a trade agreement with Australia. Use a critical value approach
the 5%, 1-sided critical value you need is 1.653.
(5 marks)

Regression Analysis
(5) You next estimate a regression model in Excel using the following variables:
TRADE

Amount of trade from Australia to the particular partner country in

$AU billion

AGREEMENT

1 if Australia and the partner country have a trade agreement;

0 otherwise

LANDLOCKED =

1 if the partner country is fully surrounded by other land mass;

0 otherwise

ENGLISH

1 if the partner country has English as its official language;

0 otherwise

DISTANCE

Straight-line distance between Canberra and the partner countrys

capital city, Km

DISTANCE2

Distance squared

Region dummies:
AMERICAS:

1 if the partner country is located in the Americas, 0 otherwise

ASIA / PACIFIC:

1 if the partner country is located in the Asia / Pacific region, 0

otherwise

EUROPE:

1 if the partner country is located in Europe, 0 otherwise

MIDDLE EAST / AFRICA: 1 if the partner country is located in the Middle East / Africa
region, 0 otherwise
N.B.

All countries can be categorised into one of these four regions.

Excels regression output follows.

Page 5 of 10

SUMMARY OUTPUT
Regression Statistics
Multiple R
0.475683
R Square
0.226275
Adjusted R Square
0.190904
Standard Error
556.5904
Observations
184
ANOVA
df
Regression
Residual
Total

Intercept
Agreement
Landlocked
English
Distance
Distance2
Asia / Pacific
Europe
Middle East / Africa

8
175
183

SS
MS
F
Significance F
15854713 1981839 6.397304
2.78E-07
54213749 309792.9
70068462

Coefficients Standard Error

1106.081
367.6528
68.33897
129.6361
-150.97
113.0825
35.82602
90.9546
-0.26485
0.108279
1.5E-05
7.6E-06
370.9882
169.3321
113.7369
146.9525
130.7913
128.5126

t Stat
3.008493
0.52716
-1.33504
0.393889
-2.44603
1.977465
2.190891
0.77397
1.017732

P-value
Lower 95% Upper 95%
0.003013
380.4768 1831.685
0.59875
-187.513 324.1905
0.183597
-374.151 72.21125
0.694142
-143.683 215.3352
0.015433
-0.47855
-0.05115
0.049559
2.93E-08
3E-05
0.029781
36.79227 705.1841
0.439993
-176.291 403.7642
0.31021
-122.843 384.4254

(a)

Interpret each of the estimated coefficients in the model, except the coefficients for
Distance and Distance2. Are the signs what you would expect? Explain.
(12 marks)

(b)

(i) Perform a significance test on the Agreement dummy (use a p-value approach).
(3 marks)
(ii) Contrast the estimate and p-value for the Agreement dummy for this regression with
that in (4). Explain.
(3 marks)

(c)

Roughly sketch a graph of the estimated relationship between Trade and Distance. Label
the axes and the value of Distance where the turning point occurs. Does this relationship
seem reasonable?
(4 marks)

Page 6 of 10

(d)

(i) Perform significance tests on each of the region dummies using a critical value
approach Excel output follows.

(9 marks)
(ii) How is it possible that a test may reject a true null hypothesis? If you were to
increase the significance level of your test, what probability are you increasing? If
you specify a null hypothesis that is actually false, would you expect to reject the null
more or less often when you increase the significance level? Explain.
(5 marks)

Page 7 of 10

(e)

You next evaluate the fit of the model.

(i) Interpret the R-Squared.
(2 marks)
(ii) Interpret the standard error for the regression.
(2 marks)
(iii) Below is a residual plot for the data, against DISTANCE. Would you say the model
fits well?

Distance Residual Plot

5000
4000

Residuals

3000
2000
1000
0
0

2000

4000

6000

8000

10000

12000

-1000
-2000
Distance

(2 marks)

(iv) Based on your answers to (i)-(iii), do you think this model fits the data well?
(1 mark)

Page 8 of 10

Time Series Analysis

(6) You next consider how Australias trade volume has changed over the last 15 years. Below is a
plot of Australias export volume ($ billion) between 1990 and 2005.

Australian Export Volume

$ billion
45
40
35
30
25
20
15
10
5

(a)

Mar-05

Mar-04

Mar-03

Mar-02

Mar-01

Mar-00

Mar-99

Mar-98

Mar-97

Mar-96

Mar-95

Mar-94

Mar-93

Mar-92

Mar-91

Mar-90

Describe the features of this series.

(3 marks)

(b)

By looking at this graph, it would seem that Australias export volume has grown
substantially over the last 15 years in 1990 it was $12.2 billion, growing to $37.7 billion
by 2005. What is the problem with this comparison? Suggest a divisor that would enable
you to make a more appropriate comparison between 1990 and 2005.
(3 marks)

Page 9 of 10

(c)

You are interested in forecasting Australias export volume into the future. You fit a
linear trend model with quarterly seasonal dummies.
N.B. The time trend variable (t) is set to zero in the 4th quarter of 1989.

SUMMARY OUTPUT
Regression Statistics
Multiple R
0.958692
R Square
0.919091
Adjusted R Square
0.913605
Standard Error
2.045236
Observations
64
ANOVA
df
Regression
Residual
Total

Intercept
t
Quarter 2
Quarter 3
Quarter 4

4
59
63

SS
MS
F
Significance F
2803.494 700.8735 167.5532
1.72E-31
246.7964 4.182991
3050.29

Coefficients Standard Error

9.395656
0.667962
0.353217
0.013865
1.350221
0.723233
1.515567
0.723632
2.194537
0.724295

t Stat
14.06616
25.47577
1.866923
2.09439
3.029892

P-value
Lower 95% Upper 95%
1.67E-20
8.059068 10.73224
1.57E-33
0.325473
0.38096
0.066883
-0.09697 2.797407
0.04053
0.067583
2.96355
0.003628
0.745225 3.643849

(d)

Carefully interpret all of the estimated coefficients in this model. Do the estimates seem
plausible? Explain.
(10 marks)

(e)

Use the model to forecast export volume for each of the four quarters of 2006 (N.B. t =
65 in the 1st quarter of 2006). Be sure to show your working.
(6 marks)

End of Examination

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