Academy of Economic Studies

Econometrics Project

Badescu Victor Ioan

Group 131

Introduction
This project is meant to analyze both simple and multiple regressions for a given database regarding the relation between GDP and imports and exports of a country and also to perform the hypothesis testing. The calculus was done with the help of Excel and the data was taken from a unique source, this being: http://www.nationmaster.com/statistics. The project has the following structure: firstly the simple regression will be analyzed, after this we will add one more independent variable, so concluding the multiple regression and in the end conducting hypothesis testing. First of all, GDP, Gross Domestic Product, refers to the market value of all final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a country's standard of living, although this can be problematic because GDP per capita is not a measure of personal income. Secondly, I will present you with a brief introduction in exports. This term export is derived from the conceptual meaning as to ship the goods and services out of the port of a country. The seller of such goods and services is referred to as an "exporter" who is based in the country of export whereas the overseas based buyer is referred to as an "importer". In International Trade, "exports" refers to selling goods and services produced in home country to other markets. Any good or commodity, transported from one country to another country in a legitimate fashion, typically for use in trade. Export goods or services are provided to foreign consumers by domestic producers. The final variable is import, which is derived from the conceptual meaning as to bring in the goods and services into the port of a country. The buyer of such goods and services is referred to an "importer" who is based in the country of import whereas the overseas based seller is referred to as an "exporter". Thus an import is any good (e.g. a commodity) or service brought in from one country to another country in a legitimate fashion, typically for use in trade. It is a good that is brought in from another country for sale. Import goods or services are provided to domestic consumers by foreign producers. An import in the receiving country is an export to the sending country.

Presenting the Data

Nr. CRT. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 Country Argentina Australia Austria Belgium Brazil Bulgaria China Colombia Croatia Denmark Egypt Finland France Germany Greece Hungary Italy India Ireland Japan Mexico Norway Poland Portugal Romania Russia Spain Sweden Switzerland Tunisia Turkey Ukraine United Kingdon United States Uruguay Uzbekistan Venezuela Yemen Zambia Zimbabwe GDP(billions $) y1 596 890 332 396 2194 93 9872 431 78 201 501 187 2160 2325 321 190 1782 4046 172 4338 1560 276 725 247 253 2229 1376 354 326 100 958 306 2189 14,720 32 48 155 17 8 5 Exports(billions $) x1 68 210 157 279 199 19 1506 40 12 99 25 73 508 1337 21 93 458 201 115 765 303 137 160 46 51 376 268 162 232 16 117 49 405 1270 7 13 64 7 6 2 Imports(billions $) x2 52 200 156 281 187 22 1307 36 20 90 46 69 577 1120 45 87 459 327 70 638 306 74 167 68 59 237 324 158 226 20 166 53 546 1903 8 9 31 8 5 2

The countries are arranged in an alphabetical order, with GDP as the dependent variable and Exports and Imports as the independent variables. There is a strong connection between them, because exports and imports influence GDP. GDP = private consumption + gross investment + government spending + (exports imports)

Simple Regression
Linear regression is defined as the relationship between a scalar variable y and one or more explanatory variables denoted X. The case of one explanatory variable is called simple regression. More than one explanatory variable is multiple regression. In regression analysis, an estimating equation is developed to describe the functional nature of the relationship that exists between the variables. The dependent variable (Y) is estimated from the independent variable (X) using a regression function. In our case I am going to estimate GDP.

GDP Residual Plot

10000 Residuals 5000 0 -5000 -10000 0 500 1000 1500 2000

GDP

The Residual Plot for GDP If we use the equation of a straight line to describe the relationship between the dependent and the independent variable we say that we use a simple linear regression model.

The coefficient of correlation (Multiple R) measures the strength of the relationship between two or more variables and takes values between -1 and 1: the closer to 1, the stronger the relationship between the variables. Multiple R=0.821459809, which shows there is very strong relationship between the presented variables. The coefficient of determination (R2) is the proportion of variability in a data set that is accounted for by the statistical model and it provides a measure of how well future outcomes are likely to be predicted by the model. In our case, R2=0.674796218, which means that 67.47% of the value of the GDP is explained by the independent variable taken into consideration by the model. The adjusted coefficient of determination is 66.62% and it suggests the fact that no matter how we measure the coefficient of determination, the models pattern is good.

Regression Statistics Multiple R 0.821459809 R Square 0.674796218 Adjusted R Square 0.666238224 Standard Error 1614.003221 Observations 40

Analysis of variance is going to be presented next: we have in the first column of the table, the number of degrees of freedom: 39.
ANOVA df 1 38 39 SS MS F 205404258.9 2.05E+08 78.84981 98990243.11 2605006 304394502 Significance F 8.32664E-11

Regression Residual Total

Now I will define the hypothesis: H0: The model is not valid. H1: The model is valid.

The value of the statistics of the test was calculated by Excel and the value is F=78.84981. Next we compare the F test value and the theoretical one for a significance level of 5% and 1 and respectively 39 degrees of freedom. The value from Fischers table is: Ftab= 3.187. F > Ftab => we can reject H0, so the model is said to be valid. Significance F represents the critical unilateral probability. If the displayed value is less than the significance level already fixed (0.05), then the null hypothesis is rejected for the alternative hypothesis. As F=78.84981 and Significance F = 8.32664 < =0.05, this shows us that we can reject the null hypothesis in favor of the alternative hypothesis, the model being valid.
Coefficients -131.0024622 6.301042779

Intercept X Variable 1

After Microsoft Excel did the computations for me, I used the coefficients from the above table to determine the regression's equation, this being: Y= -131.002+ 6.301*X

Testing the parameters

1. State the null and alternative hypothesis: H0: 1=0; H1:1: 0 2. Define , level of significance =5% 3. T test Computing the degrees of freedom (40-2=38) 4. Defining the acceptance and rejections regions requires the use of the level of significance and the degrees of freedom. I used Microsoft Excel for a TINV of 0.05 and 38, TINV(0.05, 38)= 2.024

For values smaller than -2.024 or greater than 2.024, there are in the rejection area, whereas values between -2.024 and 2.024 are in the acceptance region. 5.

the formulas for standard error.

From the calculus in excel we can see that t= 8.87974153629776. 6. Because t > 2.024, the decision is to reject the null hypothesis in favor of the alternative one.

7. According to the results, there is a linear relationship between GDP and exports, meaning that any growth in exports will determine a change in GDP.
Coefficients Intercept X Variable 1 -131.0024622 6.301042779 P-value Lower 95% 309.5481731 0.423205 0.674531 -757.649972 0.709597543 8.879742 8.33E-11 4.864537666 Standard Error t Stat Upper 95% 495.6450477 7.737547892

At 95% level of confidence, the confidence interval for the slope is (4.86, 7.73), which does not include 0. That proves that there is a linear relationship between GDP and exports.

Multiple Regression
Multiple regression analysis is more amenable because it allows us to explicitly control for many other factors that simultaneously affect the dependent variable. This is important both for testing economic theories and for evaluating policy effects when we must rely on non experimental data. IF we add more factors to our model that are useful for explaining Y, then more of the variation in Y can be explained. Thus, multiple regression analysis can be used to build better models for predicting the dependent variable. An additional advantage of multiple regression analysis is that it can incorporate fairly general functional form relationships. In the simple regression model, only one function of a single variable can appear in the equation.

GDP Residual Plot

4000 Residuals 2000 0 -2000 -4000 0 500 1000 1500 2000

GDP

The Residual Plot for GDP for multiple regression

SUMMARY X OUTPUT
R -10000 -10000 0

Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations

0.935579689 0.875309354 0.868569319 1012.825151 40

Multiple R=0.935, which represents a strong relationship between the presented variables. R2=0.875, which means that 87.5% of the variation of the value of the GDP is explained by the independent variables taken into account by the model, while the other 12.5% remains unexplained. The adjusted coefficient of determination is 0.8685->86.85% and it proves the fact that no matter how we measure the coefficient of determination, the models is reasonably good. Analysis of variance is going to be presented next: we have in the first column of the table, the number of degrees of freedom: 39.
ANOVA df Regression Residual Total 2 37 39 SS 266439354.9 37955147.07 304394502 MS F 133219677.5 129.8672 1025814.786 Significance F 1.87468E-17

Now I will define the hypothesis: H0: The model is not valid. H1: The model is valid.

The value of the statistics of the test was calculated by Excel and the value is F=129.8672. Next we compare the F test value and the theoretical one for a significance level of 5% and 1 and respectively 39 degrees of freedom. The value from Fischers table is: Ftab= 3.187. F > Ftab => we can reject H0, so the model is said to be valid. If the displayed value is less than the significance level already fixed at 5% then the null hypothesis is rejected for the alternative hypothesis. As F=129.8672 and Significance F = 1.87468E < =0.05, this shows us that we can reject the null hypothesis in favor of the alternative hypothesis, the model being valid.
Coefficients -148.206935 -4.237121961 10.31234313

Intercept Exports Imports

After Microsoft Excel did the computations for me, I used the coefficients from the above table to determine the regression's equation, this being: Y= -148.20 + (-4.237)*X1 + 10.31*X2 Testing the parameters is the following step for our regression interpretation:
Intercept Exports Imports Coefficients -148.206935 -4.237121961 10.31234313 Standard Error 194.2615962 1.436922085 1.336909522 t Stat -0.76292452 -2.948748581 7.713568469

1. State the null and alternative hypothesis: H0: 1=2=m=0; H1: at least one parameter is not equal to 0 2. Fischer test =5%; k = nr. Of coefficients = 3 F (,k,n-k) = F(0.05, 3, 37) = 2.85

3. Determining the rejection and acceptance region The acceptance region is between -2.85 and 2.85, the other values being in the rejection area. 4. F= 129.86718391718 from the Excel table; which means that the values are in the rejection region and the model is valid, due to the fact that 129.86718391718 > 2.85

The validity of the model is also shown by the Regression done by Excel.
Regression Statistics Multiple R 0.935579689 R Square 0.875309354 Adjusted R Square 0.868569319 Standard Error 1012.825151 Observations 40

Conclusion
The goal of this paper was to show that there is a positive linear relationship between GDP and two of its most important components: exports and imports, in most countries. Through the use of Microsoft Excel I have performed simple regression analysis on GDP and exports, explaining it step by step and also multiple regression analysis thus proving the initial statement.

Bibliography
www.wikipedia.com http://www.nationmaster.com/graph/eco_inn-economy-innovation Basic Econometrics For Business Administration Prof. univ. dr. Constantin Mitrut, Prof. Univ. Dr. Daniela erban