Question

A country’s GDP depends positively on its exports. Test this relationship using a time series with...

A country’s GDP depends positively on its exports. Test this relationship using a time series with annual data for the last 30 years.

a) Write out the appropriate regression formula of the country’s GDP positively depending on its exports.

b) Write out another regression formula that would allow you to test if the relationship between GDP and exports is non-linear.

c) How would you know that the relationship between the two variables, GDP and exports might be non-linear?

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Answer #2

(a) The regression formula can be written as follows:

GDPt = B0 + B1 Exportst + et

where GDPt is the value of GDP in year t and Exportst is the value of exports in year t, et is the error term. If the relation is positive, B1 should have a positive value.

(b) To test for non linear relation, we include the exports squared as an independent variable as well

GDPt = B0 + B1 Exportst + B2 Exportst2 + et

(c) The relationship between exports and GDP will be non-linear if the coefficient on exports square = B2 is significant at a minimum if 10% level. If not the relation is not non-linear

answered by: anonymous
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