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Faculty of Business and Information Science: Tutorial 4

This document provides a tutorial on basic econometrics. It begins by asking the student to state the first seven assumptions of the classical linear regression model and explain their meaning and importance. It then asks about the properties of ordinary least squares estimators under this model. Several questions follow about interpreting the coefficients and standard errors of an example regression equation. The document concludes by explaining the ordinary least squares method, causes of non-normal errors, and providing a practical lab exercise involving fitting a regression line to sample data and interpreting the results.

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Win Li
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117 views

Faculty of Business and Information Science: Tutorial 4

This document provides a tutorial on basic econometrics. It begins by asking the student to state the first seven assumptions of the classical linear regression model and explain their meaning and importance. It then asks about the properties of ordinary least squares estimators under this model. Several questions follow about interpreting the coefficients and standard errors of an example regression equation. The document concludes by explaining the ordinary least squares method, causes of non-normal errors, and providing a practical lab exercise involving fitting a regression line to sample data and interpreting the results.

Uploaded by

Win Li
Copyright
© © All Rights Reserved
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
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BFI204 BASIC ECONOMETRICS

Faculty of Business and Information Science

Tutorial 4

1. State the FIRST SEVEN assumptions of the classical linear regression model (CLRM) and
give an intuitive explanation of the meaning and need for them.

2. What are the properties of ordinary least square (OLS) estimators under the classical
linear regression model?

3. Consider the following estimated regression equation (standard errors in the


parentheses):

Yˆt  120  0.10 Ft


(0.05)
Where Yt = the corn yield (bushels/acre) in year t
Ft = fertilizer intensity (pound/arce) in year t

(a) Carefully state the meaning of the coefficient 0.10 in this equation in terms of the
impact of F on Y.
(b) Does the constant term of -120 really mean that negative amount s of corn is
possible? In not, what is the meaning of that estimate?
(c) Suppose you were told that the true value of F is known to be 0.20. Does this
show that the estimate is biased? Why or why not?
(d) Suppose you were told that the equation does not meet all the classical

assumptions and, therefore, is not BLUE. Does this mean that the true  F . is
definitely not equal to 0.10? Why and why not?

4. Explain the ordinary least squares (OLS) method in the regression model. Why do we not
simply take the sum of the deviations without squaring them or take the sum of the
absolute deviations?

5. Briefly give four causes of non-normally distributed errors in the regression model.

1
BFI204 BASIC ECONOMETRICS

Faculty of Business and Information Science

Practical lab exercise:


Question 1
For the given sample data below, verify the following properties for the regression line as discuss
in Gujarati and Porter (2009) pg 59:
X 1 2 3 4 5
Y 2 5 8 7 9

It passes through the sample mean of Y and X.


(i) The mean value of the estimated Y is equal to the mean value of the actual Y.
(ii) The mean value of the residuals is zero.
(iii) The residuals are uncorrelated with the predicted Yi

Question 2
Table T4_3.8 gives data on gross domestic product (GDP) for the United States for the
years 1959–2005.

(i) Plot the GDP data in current and constant (i.e., 2000) dollars against time.
(ii) Letting Y denote GDP and X time (measured chronologically starting with 1 for
1959, 2 for 1960, through 47 for 2005), see if the following model fits the GDP
data:
Yt = β1 + β2 Xt + ut
Estimate this model for both current and constant-dollar GDP.
(iii) How would you interpret β2?
(iv) If there is a difference between β2 estimated for current-dollar GDP and that
estimated for constant-dollar GDP, what explains the difference?
(v) From your results what can you say about the nature of inflation in the United
States over the sample period?

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