REGRESSION ANALYSIS Regression analysis is a statistical tool for the investigation of relationships between variables.

Regression analysis is concerned with the study of the dependence of one variable on one or more other variables. When we construct a model using regression our first task is to estimate the population regression function on the basis of the sample regression function as accurately as possible. In this case we used Ordinary Least Square method for estimation. And this is a multiple regression model using four independent variables. TB=83686.94+168.0018ER - 0.109973GDP - 434954.7INR - 227572.5NIR Estimate equation of regression table Dependent Variable: TB Method: Least Squares Date: 04/19/12 Time: 08:55 Sample: 1981 2010 Included observations: 30 Variable C ER GDP INR NIR R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood F-statistic Prob(F-statistic) Coefficient 83686.94 168.0018 -0.109973 -434954.7 -227572.5 0.943115 0.934014 42837.83 4.59E+10 -359.7886 103.6216 0.000000 Std. Error 36285.44 511.3904 0.011294 181104.9 200561.7 t-Statistic 2.306351 0.328520 -9.737652 -2.401673 -1.134676 Prob. 0.0297 0.7453 0.0000 0.0241 0.2673 -135984.2 166763.6 24.31924 24.55278 24.39395 2.452701

Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion Hannan-Quinn criter. Durbin-Watson stat

Interpretation of regression Model TB=Trade balance ER=exchange rate NIR=nominal interest rate INR=inflation rate

GDP= gross domestic production Regression Line TB=83686.94+168.0018ER - 0.109973GDP - 434954.7INR - 227572.5NIR Here, The value of 83686.94 represents the value of trade balance when the value of other variables equal zero. When exchange rate increase by 100%, trade balance increase by 168.0018 %. When gross domestic production increase by 100% the trade balance will be decreased 0.1009973% when inflation increase by 100% trade balance will be decrease by 434954.7% When nominal interest rate increase by 100% trade balance will be increased by 227572.5

EVALUATING THE EXPLANATORY POWER OF INDIVIDUAL INDEPENDENT VARIABLES Thet test is used to determine if there is a significant relationship between the dependent variable and each independent variable. H0: i=0 there is no significant relationship between dependent & independent variables H1: i0 there is significant relationship between dependent & independent variables We consider At 95% confidence interval and if t value > 2 there is significant relationship between independent and depend variables. According to t values we can conclude that, There is a significant impact from intercept to trade balance because of t value of the intercept is 2.306351. There is no significant impact from exchange rate to trade balance because of t value is 0.328520 There is no significant impact from GDP to trade balance because of t value is -9.737652. There is a significant impact from inflation rate to trade balance because of t value is -2.401673. There is a no significant impact from nominal interest rate to trade balance because of t value is 1.134676

R-squared- This measure the success of the regression in predicting the value of the dependent variable using given no of independent variable. When R squared is equal to one we can conclude that our regression model is perfectly fit and when it equal to zero, our model does not fit. In other word we can measure the goodness of the model using R squared.

R2shows the model goodness to fit as well as we can recommend the model by using this. If
R2 value is less than 50% - the model is not suitable R2 value is in between 50% and 75% - the model is suitable R2 value is greater than 75% - highly recommend the model

In my regression model the R squared value is 94.3115% .this indicate that the dependent variable (trade balance) explain by 94.3115%jointly all the explanatory variable(GDP, inflation rate, nominal interest rate, exchange rate).I can conclude that this model is highly recommended.

Adjusted R-squared The adjusted R-squared also represent the validity of the regression model. When there are both Rsquared and adjusted R-squared the adjusted R-squared is more value than R-squared.the adjusted Rsquared is widely use to interpret the model. When calculating adjusted R-squared the no of observation is considered. In my analysis the adjusted R-squared value is 93.4014% i can conclude that the model explain the dependent variable by 93.4014% jointly with all explanatory variable. Under adjusted RSquared this model is recommended to explain the dependent variable. Overall Significance The overall significance is measured by using Prob (F-statistic) value. If Prob (F-statistic) value is less than significance level we do not accept null hypothesis. That mean the model is statistically significance. In my model the Prob (F-statistic) is 0.0000. It is less than 0.05.that mean this model is statistically significance.

Mean median test Mean Median Maximum Minimum Std. Dev. Skewness Kurtosis Jarque-Bera Probability Sum Sum Sq. Dev. Observations -135984.2 -71381.95 -10795.60 -647835.0 166763.6 -1.704757 5.028120 19.67258 0.000053 -4079527. 8.06E+11 30 61.43867 53.27000 114.9400 16.53000 33.74126 0.281080 1.560017 2.986968 0.224589 1843.160 33015.71 30 1336349. 717950.0 5604104. 85005.00 1521625. 1.469890 4.152483 12.46316 0.001966 40090466 6.71E+13 30 0.110407 0.104150 0.225400 0.014800 0.048837 0.454729 3.077568 1.041412 0.594101 3.312200 0.069165 30 0.153834 0.150801 0.252359 0.088534 0.043768 0.530872 2.559493 1.651682 0.437867 4.615006 0.055554 30

Relationship between dependant and independent variables Correlation

TB TB NIR INR ER GDP 1.000000 -0.031191 -0.069453 -0.832872 -0.957417

NIR -0.031191 1.000000 0.410548 -0.054973 -0.082416

INR -0.069453 0.410548 1.000000 -0.134933 -0.086732

ER -0.832872 -0.054973 -0.134933 1.000000 0.884287

GDP -0.957417 -0.082416 -0.086732 0.884287 1.000000

0 -100,000 -200,000 -300,000

TB
-400,000 -500,000 -600,000 -700,000 0 20 40 60 ER 80 100 120

The correlation between trade balance and exchange rate is -0.832872.This indicates that there is a strong negative association between trade balance and exchange rate.

0 -100,000 -200,000 -300,000

TB
-400,000 -500,000 -600,000 -700,000 0 1,000,000 3,000,000 GDP 5,000,000

The correlation between GDP and trade balance is -0.957417 this indicates that there is a strong negative association between trade balance and GDP.
0 -100,000 -200,000 -300,000

TB
-400,000 -500,000 -600,000 -700,000 .00 .04 .08 .12 INR .16 .20 .24

The correlation between inflation rate and trade balance is -0.069453 this indicates that there is a weak negative association between trade balance and inflation rate.

0 -100,000 -200,000 -300,000

TB
-400,000 -500,000 -600,000 -700,000 .08 .12 .16 NIR .20 .24 .28

The correlation between nominal interest rate and trade balance is -0.031191this indicates that there is little or no association between trade balance and inflation rate.

AUTOCORRELATION
Breusch-Godfrey Serial Correlation LM Test: F-statistic Obs*R-squared 1.176841 5.493402 Prob. F(4,21) Prob. Chi-Square(4) 0.3495 0.2403

Test Equation: Dependent Variable: RESID Method: Least Squares Date: 04/19/12 Time: 15:21 Sample: 1981 2010 Included observations: 30 Presample missing value lagged residuals set to zero. Variable C ER GDP INR NIR RESID(-1) RESID(-2) RESID(-3) RESID(-4) Coefficient 1950.089 150.8291 -0.003652 -22778.50 -21966.19 -0.140912 0.220170 -0.473268 -0.249006 Std. Error 37140.93 618.0747 0.015634 184681.2 201390.3 0.239195 0.329219 0.329278 0.350646 t-Statistic 0.052505 0.244031 -0.233595 -0.123340 -0.109073 -0.589111 0.668766 -1.437292 -0.710137 Prob. 0.9586 0.8096 0.8176 0.9030 0.9142 0.5621 0.5109 0.1654 0.4854

R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood F-statistic Prob(F-statistic)

0.183113 -0.128081 42244.36 3.75E+10 -356.7548 0.588420 0.776344

Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion Hannan-Quinn criter. Durbin-Watson stat

-3.27E-12 39773.93 24.38365 24.80401 24.51813 1.981877

DURBIN WATSON STATISTIC

By using Durbin Watson model we can check whether there is a auto correlation or not.for that we can use following criteria.

DW t statistic-close to 0 DW t statistic-close to 2 DW t statistic-close to 4

There is a positive correlation There is no correlation There is a negative correlation

According to this in our model there is less or no Autocorrelation problem. Because 1.911877 is very close to two.

Heteroskedasticity
This mean the variance of the error term are differ across observations. We can measure this from Heteroskedasticity test under white test

Heteroskedasticity Test: Breusch-Pagan-Godfrey F-statistic Obs*R-squared Scaled explained SS 4.737164 12.93463 17.90242 Prob. F(4,25) Prob. Chi-Square(4) Prob. Chi-Square(4) 0.0055 0.0116 0.0013

Hypothesis; H0= There is no Heteroskedasticity H1=There is Heteroskedasticity If probability value is greater than 0.05 did not accept null hypothesis. We can conclude that there is Heteroskedasticity.

 In my model the probability value is 0.0055(0.0055<0.05).since I can conclude that there is no Heteroskedasticity.

Chow test
Chow Breakpoint Test: 2002 Null Hypothesis: No breaks at specified breakpoints Varying regressors: All equation variables Equation Sample: 1981 2010 F-statistic Log likelihood ratio Wald Statistic 25.61811 60.06275 128.0906 Prob. F(5,20) Prob. Chi-Square(5) Prob. Chi-Square(5) 0.0000 0.0000 0.0000

In my model p value is greater than F cal,(0.9997>0.035818).therefore I did not reject

null hypothesis. as a result of this I can conclude that there is no special breakeven at 1994.

Residual graph
200,000 0 -200,000 -400,000 120,000 80,000 40,000 0 -40,000 -80,000 -120,000 82 84 86 88 90 92 94 96 98 00 02 Fitted 04 06 08 10 -600,000 -800,000

Residual

Actual

MULTICOLINEARITY OF THE MODEL

When we are checking the multi-co linearity of a model mainly we consider the R2 values and individual significant of the variables. When we consider this model here, R2 is .998 that means R2 has a high value of this model. When we consider about significant of individual variables we can see the significance of National Savings, Import and Broad money supply with investment. In this model exports(X3) and midyear population(X 2) has a negative Coefficient values. The model overall significant is high When we consider that all above factors together, we can conclude that there is Multi-co linearity problem exist in this model

Dependent Variable: GDP Method: Least Squares Date: 04/19/12 Time: 13:55 Sample: 1981 2010 Included observations: 30 Variable C ER INR NIR R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood F-statistic Prob(F-statistic) Coefficient -1017051. 40081.64 1760207. -1972921. 0.785723 0.760999 743887.8 1.44E+13 -446.0110 31.77945 0.000000 Std. Error 597701.3 4131.780 3125921. 3461236. t-Statistic -1.701604 9.700817 0.563100 -0.570005 Prob. 0.1008 0.0000 0.5782 0.5736 1336349. 1521625. 30.00073 30.18756 30.06050 0.180159

Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion Hannan-Quinn criter. Durbin-Watson stat

Dependent Variable: INR Method: Least Squares Date: 04/19/12 Time: 13:56 Sample: 1981 2010 Included observations: 30 Variable C GDP ER NIR R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood F-statistic Prob(F-statistic) Coefficient 0.057370 6.84E-09 -0.000436 0.459245 0.191079 0.097742 0.046389 0.055949 51.69945 2.047194 0.131869 Std. Error 0.037648 1.22E-08 0.000547 0.197631 t-Statistic 1.523857 0.563100 -0.795973 2.323754 Prob. 0.1396 0.5782 0.4333 0.0282 0.110407 0.048837 -3.179963 -2.993137 -3.120196 1.824920

Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion Hannan-Quinn criter. Durbin-Watson stat

Dependent Variable: NIR Method: Least Squares Date: 04/19/12 Time: 13:57 Sample: 1981 2010 Included observations: 30 Variable C ER GDP NIR R-squared Adjusted R-squared S.E. of regression F-statistic Prob(F-statistic) Coefficient 3.85E-16 -5.09E-18 8.25E-23 1.000000 1.000000 1.000000 1.04E-16 1.71E+30 0.000000 Std. Error 8.46E-17 1.23E-18 2.73E-23 4.44E-16 t-Statistic 4.553802 -4.139992 3.021737 2.25E+15 Prob. 0.0001 0.0003 0.0056 0.0000 0.153834 0.043768 2.82E-31 0.388131

Mean dependent var S.D. dependent var Sum squared resid Durbin-Watson stat

12

10

Series: Residuals Sample 1981 2010 Observations 30 Mean Median Maximum Minimum Std. Dev. Skewness Kurtosis Jarque-Bera Probability
-100000 -50000 0 50000 100000

-3.27e-12 2403.451 113208.7 -109195.2 39773.93 0.060634 4.986118 4.949212 0.084196

Heteroskedasticity Test: White F-statistic Obs*R-squared Scaled explained SS 9.582300 26.98295 37.34625 Prob. F(14,15) Prob. Chi-Square(14) Prob. Chi-Square(14) 0.0000 0.0194 0.0007

Test Equation: Dependent Variable: RESID^2 Method: Least Squares Date: 04/19/12 Time: 09:05 Sample: 1981 2010 Included observations: 30 Variable C ER ER^2 ER*GDP ER*INR ER*NIR GDP GDP^2 GDP*INR GDP*NIR INR INR^2 INR*NIR NIR NIR^2 R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood F-statistic Prob(F-statistic) Coefficient 1.74E+10 -2.79E+08 2325464. -134.0429 1.96E+09 -1.63E+09 12663.33 5.55E-06 -75645.76 75473.08 -1.40E+11 2.33E+11 2.95E+11 -6.64E+10 1.92E+11 0.899432 0.805568 1.37E+09 2.81E+19 -663.2976 9.582300 0.000043 Std. Error 7.24E+09 2.89E+08 2459512. 137.5198 9.59E+08 8.03E+08 12266.28 0.000738 23067.02 22652.36 4.69E+10 1.11E+11 3.33E+11 6.34E+10 1.82E+11 t-Statistic 2.399489 -0.966996 0.945498 -0.974717 2.046175 -2.031813 1.032369 0.007518 -3.279390 3.331798 -2.979882 2.109768 0.885657 -1.047164 1.056340 Prob. 0.0299 0.3489 0.3594 0.3452 0.0587 0.0603 0.3183 0.9941 0.0051 0.0046 0.0093 0.0521 0.3898 0.3116 0.3075 1.53E+09 3.11E+09 45.21984 45.92044 45.44397 2.801596

Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion Hannan-Quinn criter. Durbin-Watson stat

TREND ANALYSIS

120,000

80,000

40,000

RESID

-40,000

-80,000

-120,000 0 5 10 15 @TREND 20 25 30

6,000,000

5,000,000

4,000,000

GDP

3,000,000

2,000,000

1,000,000

0 0 5 10 15 @TREND 20 25 30

Negative strong correlation between trade balance and exchange rate which is indicated by -0.832872

Model specification and diagnostic test Ramsey RESET Test Equation: UNTITLED Specification: TB C ER GDP INR NIR Omitted Variables: Powers of fitted values from 2 to 5

F-statistic Likelihood ratio F-test summary:

Value 6.502246 24.17449

df (4, 21) 4

Probability 0.0014 0.0001

Test SSR Restricted SSR Unrestricted SSR Unrestricted SSR LR test summary: Restricted LogL Unrestricted LogL

Sum of Sq. 2.54E+10 4.59E+10 2.05E+10 2.05E+10

df 4 25 21 21

Mean Squares 6.35E+09 1.84E+09 9.76E+08 9.76E+08

Value -359.7886 -347.7014

df 25 21

Unrestricted Test Equation: Dependent Variable: TB Method: Least Squares Date: 04/19/12 Time: 10:38 Sample: 1981 2010 Included observations: 30 Variable C ER GDP INR NIR FITTED^2 FITTED^3 FITTED^4 FITTED^5 R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood F-statistic Prob(F-statistic) Coefficient 64514.12 -3731.717 0.107937 -26476.21 -74851.99 9.01E-06 1.07E-10 2.93E-16 2.48E-22 0.974588 0.964908 31239.72 2.05E+10 -347.7014 100.6740 0.000000 Std. Error 44323.37 1135.716 0.059623 201097.5 191672.8 8.24E-06 5.09E-11 1.17E-16 9.07E-23 t-Statistic 1.455533 -3.285782 1.810343 -0.131659 -0.390520 1.093149 2.100900 2.506226 2.737922 Prob. 0.1603 0.0035 0.0846 0.8965 0.7001 0.2867 0.0479 0.0205 0.0123 -135984.2 166763.6 23.78009 24.20045 23.91457 2.326002

Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion Hannan-Quinn criter. Durbin-Watson stat