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Gretl Empirical Exercise 2

Lets start by loading the data file included with this empirical exercise into Gretl. The filename
is gretl_ex2_gasoline.xls. First, save this file to your computer being sure to keep it in .xls
format. Then import this data file into Gretl using the instructions in Empirical Exercise 1 (if
you have forgotten). Gretl will recognize the first column as the year variable, and tell you so;
thats okay, click close.

We have loaded time series data related to the U.S. gasoline market from 1953 2004. The
variable definitions are as follows:

Year = Year, 1953-2004
GasExp = total U.S. gasoline expenditure in billions of U.S. dollars
Pop = U.S. total population in thousands
GasP = Price index for gasoline
Income = Per capita disposable income
PNC = Price index for new cars
PUC = Price index for used cars
PPT= Price index for public transportation
PD = Aggregate price index for consumer durables
PN = Aggregate price index for consumer nondurables
PS = Aggregate price index for consumer services


Our first task is to generate a new variable. We want to calculate real per capita gasoline
expenditures, so
=




In Gretl this can be done by clicking, Add > Define New Variable. You will see the following
window



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Enter the following formula: RealGasCap = GasExp/(Pop*Gasp), and click OK. You will see
that new variable has been generated and is listed in your variable list.

OLS Estimation of Regression Coefficients Using Gretl

I will quickly show you how to run an OLS regression in Gretl, and then Ill ask you to run a few
more regressions and interpret the results.

First, click Model > Ordinary Least Squares. The following window will appear:



Click on RealGasCap so that it is highlighted then click the blue arrow to select per capita
gasoline expenditures as the dependent variable (Y). Next, click on Gasp and click on the
green arrow to select the gasoline price index as the independent variable (X). Gretl
automatically includes a constant term in the regression (const). Once you have done this,
click OK.

So, we have estimated the following two-variable model:

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What is your expectation about the sign of

? According to microeconomic theory, the law of

demand tells us that

should be negative. An increase in the price of gasoline will lead to a

decrease in the quantity demanded of gasoline (real per capita expenditures).

Lets look at the results to find out: (I copied (by right-clicking and selecting copy) the Gretl
results in RTF (MS Word) format and pasted them below this seems to be the best option.)

Model 1: OLS, using observations 1953-2004 (T = 52)
Dependent variable: RealGasCap

Coefficient Std. Error t-ratio p-value
const 3.49626e-06 1.67769e-07 20.8397 <0.00001 ***
Gasp 2.80343e-08 2.8086e-09 9.9816 <0.00001 ***

Mean dependent var 4.94e-06 S.D. dependent var 1.06e-06
Sum squared resid 1.91e-11 S.E. of regression 6.18e-07
R-squared 0.665847 Adjusted R-squared 0.659164
F(1, 50) 99.63216 P-value(F) 1.71e-13
Log-likelihood 670.6406 Akaike criterion -1337.281
Schwarz criterion -1333.379 Hannan-Quinn -1335.785
rho 0.870146 Durbin-Watson 0.211859

What happened? We obtain a statistically significant slope coefficient equal to 0.000000028,
implying that a one unit increase in the gasoline price index will lead to a 0.000000028 billion
dollar increase in real per capita gasoline expenditures (recall that expenditures are measured in
billions of dollars). So in other words, a one unit increase in in the gasoline price index will lead
to a 28 dollar increase in real per capita gasoline expenditures. We can also see the calculated

(coefficient of determination) is equal to 0.6658 meaning that around 67% of the variation in real
per capita gasoline expenditures is explained by the gasoline price index.

Have we just proven that the law of demand does not hold for gasoline? Not so fast. First of all,
while this result is statistically significant; is it economically significant? Obviously, there are
many other things that may be impacting the demand for gasoline besides its own price. So we
will estimate this model in a multiple regression context and estimate different demand
elasticities on Homework 3; but for now, lets just run a few more two-variable regressions to
develop our intuition about some of these expected relationships.

NOTE that the price variables included in this data set are price indices, NOT the actual prices of
the various commodities over time! In other words, the price variables are NOT measured in
dollars. Since they are indices, they have no units; but they do tell us how prices are changing
over time.

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EXERCISES:

1. Setup a two-variable regression model (i.e. write down the PRF) to examine the impact of per
capita disposable income on real per capita gasoline expenditures.

a. Based off your know knowledge of microeconomic theory, what are your expectations
about the sign of

? Why?

b. Estimate the model. Display your regression results.

c. Is

statistically significant? How do you know?

d. Comment on the sign of

. Does this align with your expectations? Provide an

interpretation of the slope coefficient

.


2. Setup a two-variable regression model (i.e. write down the PRF) to examine the impact of the
price of public transportation on real per capita gasoline expenditures.

a. Based off your knowledge of microeconomic theory, what are your expectations about
the sign of

? Why?

b. Estimate the model. Display your regression results.

c. Is

statistically significant? How do you know?

d. Comment on the sign of

. Does this align with your expectations? Provide an

interpretation of the slope coefficient