1.

DATA The graphs including 1 explanatory variable and the dependent variable Y

FIGURE 1: Scatter Diagrams 3 explanatory variables are plotted against the US GDP

90000 80000 70000 60000 50000 40000 30000 20000 10000 0 1920 1930 1940 1950 1960 1970 1980

Employment

80 70 60 50 40 30 20 10 0 1920 1930 1940 1950 1960 1970 1980

Real wage

100 90 80 70 60 50 40 30 20 10 0 1920 1930 1940 1950 1960 1970 1980

CPI

2. model specification From the data collected, we first examine the linear model with four explanatory variables including: Employment employee Real wages dollars CPI dollars Abbreviation-E Abbreviation RW unit: million of unit:million of unit:million of

Abbreviation CPI

Functional model test

CV=

The result from eview are as follow.

THE LINEAR MODEL The linear model: Y=1 + 2X2 + 3X3 + + nXn (When n is the number of explanatory variable) Table 1:Eview result linear regression of GDP and the 3 regressiors:

Dependent Variable: GDP Method: Least Squares Date: 04/26/12 Time: 01:06 Sample: 1929 1970 Included observations: 42 Variable E RW CPI C R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood F-statistic Prob(F-statistic) Coefficient 0.024782 63.42272 -1.700098 -990.7010 0.960787 0.957691 223.7417 1902294. -284.7343 310.3534 0.000000 Std. Error 0.008313 6.281703 3.950606 388.5908 t-Statistic 2.980999 10.09642 -0.430339 -2.549471 Prob. 0.0050 0.0000 0.6694 0.0149 3647.900 1087.753 13.74925 13.91475 13.80991 0.486541

Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion Hannan-Quinn criter. Durbin-Watson stat

CV= 223.7417/3647.90=0.0613

THE LOG-LOG MODEL

The Log-log model: Log (Y)=1 + 2 Log (X2) + 3 Log(X3)+ + nLog(Xn) Where n is the number of explanatory variables

Table 2:Eview result LOG-LOG model of regression function of GDP and the 3 repressors:

Dependent Variable: LNGDP Method: Least Squares Date: 04/26/12 Time: 01:19 Sample: 1929 1970 Included observations: 42 Variable LNE LNRW LNCPI C R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood F-statistic Prob(F-statistic) Coefficient 0.615996 0.846086 -0.082974 -1.599167 0.954754 0.951182 0.070829 0.190637 53.70066 267.2851 0.000000 Std. Error 0.174063 0.078127 0.062718 1.702241 t-Statistic 3.538915 10.82964 -1.322968 -0.939448 Prob. 0.0011 0.0000 0.1938 0.3534 8.154325 0.320570 -2.366698 -2.201206 -2.306039 0.409072

Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion Hannan-Quinn criter. Durbin-Watson stat

CV=0.070829/8.154325=0.00868

THE LOG-LIN MODEL

The Log-lin model: Log (Y)=1 + 2 X2 + 3X3+ + nXn Where n is the number of explanatory variables

Table 3:Eview result LOG-LIN model of regression function of GDP and the 3 regressors
Dependent Variable: LNGDP Method: Least Squares Date: 04/26/12 Time: 01:23 Sample: 1929 1970 Included observations: 42 Variable E RW CPI C R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood F-statistic Prob(F-statistic) Coefficient Std. Error 1.04E-05 0.021124 -0.004610 6.710601 0.944378 0.939987 0.078532 0.234356 49.36487 215.0611 0.000000 2.92E-06 0.002205 0.001387 0.136393 t-Statistic 3.557791 9.580889 -3.324555 49.20056 Prob. 0.0010 0.0000 0.0020 0.0000

Mean dependent var 8.154325 S.D. dependent var 0.320570 Akaike info criterion -2.160232 Schwarz criterion -1.994740 Hannan-Quinn criter. -2.099572 Durbin-Watson stat 0.396472

CV=0.078532/8.154325=0.00963 THE LIN-LOG MODEL

The Lin-log model: Y=1 + 2 Log (X2) + 3 Log(X3)+ + nLog(Xn) Where n is the number of explanatory variables

Table 4:Eview result LIN-LOG model of regression function of GDP and the 3 regressors.
Dependent Variable: GDP Method: Least Squares Date: 04/26/12 Time: 01:23 Sample: 1929 1970 Included observations: 42 Variable LNE LNRW LNCPI C R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood F-statistic Prob(F-statistic) Coefficient Std. Error 1419.684 2600.716 434.4306 -23867.70 0.962923 0.959996 217.5610 1798645. -283.5578 328.9677 0.000000 534.6579 239.9766 192.6469 5228.651 t-Statistic 2.655313 10.83737 2.255061 -4.564791 Prob. 0.0115 0.0000 0.0300 0.0001 3647.900 1087.753 13.69323 13.85872 13.75389 0.481542

Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion Hannan-Quinn criter. Durbin-Watson stat

CV=217.5610/3647.900=0.0596
Since CV is the criteria and CV corresponding with the LOG-LIN MODEL is the least out of 4 CVs We determine that LOG-LIN MODEL is the model best fit the data and well illustrates the relation between dependent variable and independent variables

Conclusion: the model specification process ends with the following result: LOG(GDP)^= 6.710601 + (1.04E 05) (EMPLOYMENT) + 0.021124 (REAL WAGE) 0.004610 (CPI)

3.

Results

Interpret the results:

1. Intercept (1^) = 6.710601 indicates GDP on average if all independent variables are zero. However, it is impossible that all values of employment, real wage and CPI are zero; so the value of intercept coefficient here is not meaningful. 2. Holding other variables constant, the value of slope coefficient 2^ = 1.04E 0.5 shows that the amount of employment increase by one unit will lead GDP to increase by 1.04E 0.5 percent of on average. It is predicted that the slope coefficient for that variable (2^) take positive value 3. Holding other variables constant, the value of slope coefficient 3^= 0.021124 shows that one percent increase in real wage will lead GDP to increase by 0.021124 percent of on average It is predicted that the slope coefficient for that variable (3^) take positive value 4. Holding other variables constant, the value of slope coefficient 4^ = -0.004610 shows that one percent increase in CPI will lead personal income to decrease by 0.004610 percent of on average

 It is predicted that the slope coefficient for that variable (4^) take negative value
5. Moreover, R2 = 0.944378 ( 94.44%) shows that about 94.44% of variation in GDP are

explained by the variation in 3 independent variables. This value of coefficient of determination is relatively high indicating a fairly good model.