-Econometrics project-

A.
Tabel nr. 1: GDP and Government expenses for year 2010 in European Union

i x
i
y
i

Nr. Crt.
Government Expenses
(mil Euro) GDP (mil Euro)
Belgium 1 83681.00 339162.00
Bulgaria 2 5695.00 35043.10
Czech 3 30223.50 137161.50
Denmark 4 66651.70 222409.80
Germany 5 472140.00 2397100.00
Estonia 6 3048.70 13860.80
Ireland 7 31090.90 159645.70
Grece 8 45442.70 233046.00
Spain 9 222782.00 1053914.00
France 10 469755.50 1907145.00
Italy 11 327814.00 1520870.00
Cyprus 12 3364.40 16946.50
Latvia 13 3637.20 18538.70
Lithuania 14 5816.70 26507.70
Luxemburg 15 6349.10 38044.70
Hungary 16 20663.80 92941.60
Malta 17 1246.70 5749.70
Netherlands 18 162654.00 571979.00
Austria 19 54714.20 274320.50
Poland 20 57249.50 310485.50
Portuga 21 35825.60 168075.60
Romania 22 20985.60 115869.20
Slovakia 23 7168.30 35384.40
Slovenija 24 12601.70 63050.70
Finland 25 43002.00 171315.00
Sweden 26 81333.70 292680.40
UK 27 367468.10 1563106.40
TOTAL 27 2642405.60 11784353.50
Source: Eurostat: [tec00001], [tec00010]
1







http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home/
Using the appropriate theories from economic literature, describe the relationship between X and Y; describe
the chosen variables, the data source .
Gross Domestic Product. The total market value of all final goods and services produced in a country in a
given year, equal to total consumer, investment and government spending, plus the value of exports, minus the
value of imports. Economic theories learns us that this of macroeconomic indicator can be calculated with a variety
of methods , but the most used is the next one:
GDP = Expenses + Investments + Net Export
Where Expenses = Private Expense + Government Expenses
By government expenses we understand all the expenses for goods and services for governmental use.
So , we will see next if it is indeed sufficient statistical evidence to conclude that it exists an direct link between
Government expenses and GDP . For this review , i used dates from year 2010 for the members of European Union. We
will consider the independent variable Government expenses , marked with X , wich will influence(or not) the values of
the dependent variable , marked with Y , representing GDP.
Regresion ecuation: Y = f(X) +
Regresion line: y
i
= + x
i
+
i
,
Where i=1,n
Y=dependent variable
X=independent variable
=residual component
But in the sample: y
i
= a + bx
i
+ e
i

Where a and b estimators for i ; e =residual value in sample


y =4.503x - 4255.552
R =0.984
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
0 50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000 450,000 500,000
G
D
P

(
m
i
l
.

)
Governemnt Expenses (mil. )
Observing the graphical representation of the link between GDP and Government Expenses, we can say that
between those variables exists an direct link : while the independent variable(Gov.Expenses) increases, the dependent
variable(GDP) also increses.
Calculate and interpret the coefficients of the regression line, the coefficient of determination and coefficient of
correlation
min

=
=min (

)

=

The function will reach minimum when the first grade derivative will be 0.
{

=
+

=
=

=
+

=

For our situation:
2642405.60 = 27a + 11782581.10b
3567348047520.25= 11782581.10a + 794797993657.10b
a = - 4255.55
b = 4.50
Parameter a represents the value wich GDP (dependent variable ) will register when the Government Expense
are 0, an imposible situation in real life because GDP will always be positive. Parameter b is an regression
coefficient and the estimator for regression line( If the Government expense increse with 1% , GDP will increse with
4.5 mill E). So the regression function will be like:
y
i
= - 4255.55 + 4.50x
i
From Excel , we obtained correlation coefficient (Multiple R ) r= 0.9920962 The link is almost perfect
Step 1:
H0: = 0
H1: 0
Step 2: While n<30 we will use Student Test
t
tab
= t
(/2;n-k-1)
= t
(0.05/2;25)
=

TINV(0.05, 25) = 2.06

= 39.50
Because t
calc
> t
tab,
we accept H1 and we reject H0. The link between GDP and Government expenses is linear.
This econometric model describe the link between GDP and Government Expenses as beeing very
strong , almost perfect, and positive , with the coefficient of correlation = 0.992 .So, the correlation
coefficient is statistically significant.

Coefficient of determination R square = 0.98425487 . 98.4% of the variation of GDP can be attributed to
government expenses.

Test if the coefficients of the regression line are statistically significant
Testing parameter :
H0: = 0
H1: 0
= 0,05
We will use Student test because n<30 ( n=27)
t
tab
= t
(/2;n-k-1)
= t
(0.05/2;25)
=

TINV(0.05, 25) = 2.06

=
2455.68
.
= 0.57

)

=
= .
Because t
calc
(-t
tab
; +t
tab
), we will accept H0 , and we will reject H1 . So the parameter is not
statistically significant.
Testing parameter
H0: = 0
H1: 0
= 0,05
We use again Student Test (n=27<30).
t
tab
= t
(/2;n-k-1)
= t
(0.05/2;25)
=

TINV(0.05, 25) = 2.06

=
.
.
=39.53
Seeing that t
calc
> t
tab
, we have sufficient statistical evidence to reject H0 and to accept H1. This
demonstrates that is statistically significant .
Test the validity of the regressions model
There are 3 ways of testing the validity :
a) t
tab
vs

b) Pvalue vs
c) Lower vs upper limits of &

a) F
tab
vs

F
tabelar
= FINV(0.05, 1, 25) = 4.24
F
calculat
= 1562.79 (ANOVA)
Because F
calc
> F
tab
we could say that the linear regression model is representative for describing the link
between GDP and Government expenses.
b) Pvalua for a= 0.571> , parameter is not significant
Pvalue for b=4.63E-24<0.05 , parameter is significant
c) ( Lower a , Upper a) : Lower is negative while Upper is positive parameter is not
significant
(Lower b , Upper b) : Both lower and upper limits are positive parameter is significant