Question

Propose a regression equation you would like to estimate. Write out the equation and define the dependent and independent variables, and indicate how you would measure them. What type of data would you use and, as a result, what is an observation in your dataset? Finally, why would you want to estimate this regression – what would be the purpose/insight?

Answer 1

Regression equation I would like to estimate:

GDP = beta0 + beta1*C + beta2*I + error term

where

Dependent Variable

GDP = Real GDP of a country

Independent Variable:

C = Consumption expenditure

I = Investment expenditure

I would measure than based on the OLS technique. Sum of residuals have to minimized in order to arrive at the estimators of independent variables.

I would use a time - series data of a country for particular time period. Each row in the dataset show the actual values of Real GDP, Investment and Consumption Expenditure for a selected timestamp.

The purpose of my study is to know how the Real GDP has changed in the recent past and how the factors like C and I have contributed in its movement. The main purpose is to estimate or predict the Real GDP of the future based on the available data.

Many other insights could be drawn like whether C contributes more to Real GDP or I. If error term is large size, we can know that most of the variations in Real GDP is explained not through by C and I but by other factors like import, exports, etc.