PS2Solutions

# PS2Solutions - Economics 1011b Problem Set 2 Solutions...

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Economics 1011b Problem Set 2 Solutions Exercise 1 Empirical work Go to the Bureau of Economic Analysis website and download quarterly na- tional accounts data from 1980 to the most recent available. You will want real GDP, for billions of chained (2000) dollars (from http://www.bea.gov/national/nipaweb/SelectTable.asp?Popula 1. Graph the series for GDP, Personal consumption expenditures, and Gross private domestic investment. GDP 0 1000 2000 3000 4000 5000 6000 7000 8000 9000 10000 11000 12000 13000 1980-I 1985-I 1990-I 1995-I 2000-I 2005-I 1

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Consumption 0 1000 2000 3000 4000 5000 6000 7000 8000 9000 1980-I 1985-I 1990-I 1995-I 2000-I 2005-I Investment 0 1000 2000 3000 1980-I 1985-I 1990-I 1995-I 2000-I 2005-I 2. Why would it not make sense to ﬁt a linear trend to this data and look at deviations around that trend? What transformation needs to be done? Because they follow a geometric trend. The series need to be logged. 2
3. Do this transformation, and use a regression for each series to determine what the linear trend is. Any program can be used to do this regression, but in terms of pure convenience, it may be easiest to use Excel’s regression features. No need to report these results, but this is a very simple way to detrend the data. Can you think of reasons why it may not be entirely satisfactory if we are looking at business cycles? There may be other cycles in the data that are caused by increases in pop- ulation, for example, that we are not really all that interested in. 4. Graph the deviations around this trend for these series on the same graph. Mark on the graph the troughs, as deﬁned by the NBER of all the business cycles in the sample. What do the units on the vertical axis represent (using the approximation that ln( x ) - ln( y ) ' x - y y ). List two or more patterns in the data that you think need to replicated in models of the business cycle. What are the correlations between GDP and the two component parts? -0.25 -0.15 -0.05 0.05 0.15 0.25 1980-I 1987-III 1995-I 2002-III GDP Consumption Investment The axis represents percentage deviation divided by 100. The high degree of correlation and the large volatility of investment should be replicated, but other answers may be satisfactory. The correlations are correlations are 0.79 for consumption and 0.67 for GDP.

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## This note was uploaded on 05/04/2010 for the course ECON 1011b taught by Professor Huang during the Spring '07 term at Harvard.

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PS2Solutions - Economics 1011b Problem Set 2 Solutions...

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