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This paper studies the co-interaction of consumption and income. But the
consumption expenditure is a complex matter. It depends on the income. If
income increases in a dollar, consumption increases by a fraction of a dollar. This
fraction is the marginal propensity to consume on the simplest ways to express
such a relation of dependency is as a linear function:
C=a+bY
Where C is the consumption expenditure, Y is the national income
and "a" and "b" is constant.
In this paper, we will consider a relation between the consumption and the income.
Moreover this paper will use an econometric method to estimate parameters in the
model, apply some test to verify the result we acquire and then conclude the model.
General model:
Ct=β1+β2YDt+εt
Where:
Ct( G C ) = C o n s u m p t i o n E x p e n d i t u r e
YDt(GYD)= Income
Before some testing process we have to establish random walks model because
regressing one random walk against another can lead to spurious results in that
conventional significance tests will tend to indicate a relationship between the two
variables when in fact none exists. This is one reason why it is important to test for
random walks. If a test fails to reject the hypothesis of a random walk, one can
difference the series question before using it in regression. Since many economic
time series seem to follow random walks, this suggests that one will typically want to
difference a variable before using it in regression. While this is acceptable,
differencing may result in a loss of information about the long- run relationship
between t w o variables
Due to time and scope, quarterly time series data from 1954.1 to 1995.21
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The co-interaction of consumption and income
There are 166 observation. The data has been collected from sheet. In addition with
this purpose the book of (i) Econometric models and Economic forecast ( by- Robert
S. pindyck and Doniel L.), fourth edition, (ii) Basic Econometrics. Domandar N.
Gujrati. fourth edition, have been used. . After analysis the result, I'll attach a copy
of data.
Date:
11/15/09
Time: 12:22
Sample: 1954:1 1995:2
GC GYD
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The co-interaction of consumption and income
GYD
Model Estimation
For the model estimation, we will do some test about the co- integration of
consumption and income. Now we apply the least square method for the ADF test
and output is show below:
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The co-interaction of consumption and income
7
C 5.47964 1.914002 2.862926 0.0048
6
R-squared 0.61358 Mean dependent 28.1215
5 var 2
Adjusted R- 0.60878 S.D. dependent 25.1343
squared 5 var 5
S.E. of regression 15.7208 Akaike info 8.36597
3 criterion 3
Sum squared 39790.2 Schwarz criterion 8.42267
resid 6 8
Log likelihood - F-statistic 127.825
683.009 3
8
Durbin-Watson 2.01185 Prob(F-statistic) 0.00000
stat 4 0
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The co-interaction of consumption and income
738.099 1
0
Durbin-Watson 1.91288 Prob(F-statistic) 0.00000
stat 6 0
D(GYD(-1)) -0.949584
(0.03716)
(-25.5512)
C 0.825001
Error D(GC,2) D(GYD,2)
Correction:
CointEq1 -0.480847 1.265850
(0.11620) (0.12944)
(-4.13802) (9.77945)
C 0.643335 0.181223
(1.26298) (1.40686)
(0.50938) (0.12881)
R-squared 0.461454 0.710258
Adj. R- 0.451293 0.704791
squared
Sum sq. 41319.57 51269.99
resids
S.E. equation 16.12053 17.95697
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The co-interaction of consumption and income
We have tested whether real consumption spending and real income are co-
integrated, using quarterly data from 1954:1 to 1952:2. we first test whether each
variable is a random walk using the augmented Dickey-Fuller test. Running this test,
first for consumption and then for the income and case include logs for the change in
the variable, always yields test statistics that fail to reject the random walk h
Hypothesis. Next run a co-integrated regression of consumption C against income
from the Durbin-Watson statistics. We can see it value and comparing the critical
value. We can reject the hypothesis at a random walk at the 5% level. Running a
Dickey-Fuller test on the residuals of the regression also leads to a rejection of the
random walk hypothesis at the 5% level.
There is no limitation on getting the essential data and information. The data which
are collected, I have assumed the all information true and collected. I have some
limitation from the span of time, besides I did not get enough facility to use EVIEWs
program for me. Notwithstanding these limitations, it is expected that it will also
contribute in a merger to have better under standing of the condition of the single
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The co-interaction of consumption and income
equation model.
Acknowledgement
References.
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The co-interaction of consumption and income
Appendix
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The co-interaction of consumption and income
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The co-interaction of consumption and income
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The co-interaction of consumption and income