BASIC ECONOMETRICS - UNJA

1 BASIC . ECONOMETRICS . FOURTH EDITION. Damodar N. Gujarati United States Military Academy, West Point Boston Burr Ridge, IL Dubuque, IA Madison, WI New York San Francisco St. Louis Bangkok Bogota Caracas Kuala Lumpur Lisbon London Madrid Mexico City Milan Montreal New Delhi Santiago Seoul Singapore Sydney Taipei Toronto McGraw-Hill Higher Education 'EZ. A Division of The McGraw-Hill Companies BASIC ECONOMETRICS . Published by McGraw-HiII/lrwin, a business unit of The McGraw-Hili Companies, Inc. 1221 Avenue of the Americas, New York, NY, 10020. Copyright 2003, 1995, 1988, 1978, by The McGraw-Hili Companies, Inc. All rights reserved. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of The McGraw-Hili Companies, Inc.

2 , including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning. Some ancillaries, including electronic and print components, may not be available to customers outside the United States. This book is printed on acid-free paper. domestic 890 DOC/DOC0987. international 67890 DOC/DOC0987. ISBN: 978-0-07-233542-2. MHID: 0-07-233542-4. ISBN: 978-0-07-112342-6. MHID: 0-07-112342-3. Publisher: Gary Burke Executive sponsoring editor: Lucille Sutton Developmental editor: Aric Bright Marketing manager: Martin D. Quinn Associate project manager: Catherine R. Schultz Senior production supervisor: Lori Koetters Senior designer: Jenny EI-Shamy Media producer: Melissa Kansa Supplement producer: Erin Sauder Cover design: Jamie O'Neal Typeface: 10/12 New Aster Compositor: Interactive Composition Corporation Printer: R.

3 R. Donnelley & Sons Company Library of Congress Control Number: 2001099577. INTERNATIONAL EDITION ISBN 0-07-112342-3. Copyright 2003. Exclusive rights by The McGraw-Hili Companies, Inc. for manufacture and export. This book cannot be re-exported from the country to which it is sold by McGraw-HilI. The International Edition is not available in North America. ABOUT THE AUTHOR. After teaching for more than 28 years at the City University of New York, Damodar N. Gujarati is currently a professor of economics in the Department of Social Sciences at the Military Academy at West Point, New York. received his degree from the University of Bombay in 1960, hIs degree from the University of Chicago in 1963, and his degree from the University of Chicago in 1965.

4 Dr. Gujarati has published extensively in recognized national and international journals, such as the Review of Econom- ics and Statistics, the Economic Journal, the Journal of Financial and Quantita- tive Analysis, the Journal of Business, the American Statistician, and the Journal of Industrial and Labor Relations. Dr. Gujarati is an editorial referee to several journals and book publishers and was a member of the Board of Editors of the Journal of Quantitative Economics, the official journal of the Indian Economet- ric Society. Dr. Gujarati is also the author of Pensions and the New York City Fiscal Crisis (the American Enterprise Institute, 1978), Government" and Busi- ness (McGraw-Hill, 1984), and Essentials of ECONOMETRICS (McGraw-Hill, 2d ed.)

5 , 1999). Dr. Gujarati's books on ECONOMETRICS have been translated into several languages. Dr. Gujarati was a Visiting Professor at the University of Sheffield, (1970-1971), a Visiting Fulbright Professor to India (1981-1982), a Visiting Pro- fessor in the School of ManagemeiJt of the National University of Singapore (1985-1986), and a Visiting Professor of ECONOMETRICS , University of New South Wales, Australia (summer of 1988). As a regular participant in USIXs lectureship program abroad, Dr. Gujarati has lectured extensively on micro- and macroeco- nomic topics in countries such as Australia, China, Bangladesh, Germany, India, Israel, Mauritius, and the Republic of South Korea.

6 Dr. Gujarati has also given seminars and lectures in Canada and Mexico. iii To my wife, Pushpa, and my daughters, Joan and Diane BRIEF CONTENTS. PREFACE xxv Introduction PART SINGLE-EQUATION REGRESSION MODELS 15. 1 The Nature of Regression Analysis 17. 2 Two-Variable Regression Analysis: Some BASIC Ideas 37. 3 Two-Variable Regression Model: The Problem of Estimation 58. 4 Classical Normal Linear Regression Model (CNLRM) 107. 5 Two-Variable Regression: Interval Estimation and Hypothesis Testing 119. 6 Extensions of the Two-Variable Linear Regression Model 164. 7 Multiple Regression Analysis: The Problem of Estimation 202. 8 Multiple Regression Analysis: The Problem of Inference 248.

7 9 Dummy Variable Regression Models 297. PART II RELAXING THE ASSUMPTIONS OF THE. CLASSICAL MODEL 335. 10 Multicollinearity: What Happens if the Regressors Are Correlated 341. 11 Heteroscedasticity: What Happens if the Error Variance Is Nonconstant? 387. 12 Autocorrelation: What Happens if the Error Terms Are Correlated 441. 13 Econometric Modeling: Model Specification and Diagnostic Testing 506. vi BRIEF CONTENTS. PART III TOPICS IN ECONOMETRICS 561. 14 Nonlinear Regression Models 563. 15 Qualitative Response Regression Models 580. 16 Panel Data Regression Models 636. 17 Dynamic Econometric Models: Autoregressive and Distributed-Lag Models 656. PART IV SIMULTANEOUS-EQUATION MODELS 715.

8 18 Simultaneous-Equation Models 717. 19 The Identification Problem 735. 20 Simultaneous-Equation Methods 762. 21 Time Series ECONOMETRICS : Some BASIC Concepts 792. 22 Time Series ECONOMETRICS : Forecasting 835. Appendix A A Review of Some Statistical Concepts 869. Appendix B Rudiments of Matrix Algebra 913. Appendix C The Matrix Approach to Linear Regression Model 926. Appendix D Statistical Tables 959. Appendix E Economic Data on the World Wide Web 977. SELECTED BIBLIOGRAPHY 979. CONTENTS. PREFACE xxv Introduction WHAT IS ECONOMETRICS ? 1. WHY A SEPARATE DISCIPLINE? 2. METHODOLOGY OF ECONOMETRICS 3. 1. Statement of Theory or Hypothesis 4. 2. Specification of the Mathematical Model of Consumption 4.

9 3. Specification of the Econometric Model of Consumption 5. 4. Obtaining Data 6. 5. Estimation of the Econometric Model 7. 6. Hypothesis Testing 8. 7. Forecasting or Prediction 8. 8. Use of the Model for Control or Policy Purposes 9. Choosing among Competing Models 10. TYPES OF ECONOMETRICS 12. MATHEMATICAL AND STATISTICAL PREREQUISITES 12. THE ROLE Of THE COMPUTER 13. SUGGESTIONS FOR FURTHER READING 13. PART SINGLE-EQUATION REGRESSION MODELS 15. 1 The Nature of Regression Analysis 17. HISTORICAL ORIGIN OF THE TERM REGRESSION 17. THE MODERN INTERPRETATION OF REGRESSION 18. Examples 18. STATISTICAL VERSUS DETERMINISTIC RELATIONSHIPS 22. \Iii viii CONTENTS.

10 REGRESSION VERSUS CAUSATION 22. REGRESSION VERSUS CORRELATION 23. TERMINOLOGY AND NOTATION 24. THE NATURE AND SOURCES OF DATA FOR. ECONOMIC ANALYSIS 25. Types of Data 25. The Sources of Data 29. The Accuracy of Data 29. A Note on the Measurement Scales of Variables 30. SUMMARY AND CONCLUSIONS 31. EXERCISES 32. 2 Two-Variable Regression Analysis: Some BASIC Ideas 37. A HYPOTHETICAL EXAMPLE 37. THE CONCEPT OF POPULATION REGRESSION. FUNCTION (PRF) 41. THE MEANING OF THE TERM LINEAR 42. Linearity in the Variables 42. Linearity in the Parameters 42. STOCHASTIC SPECIFICATION OF PRF 43. THE SIGNIFICANCE OF THE STOCHASTIC. DISTURBANCE TERM 45. THE SAMPLE REGRESSION FUNCTION (SRF) 47.