“Dimitrie Cantemir” Christian University

Knowledge Horizons - Economics

Volume 5, No. 4, pp. 168–172
P-ISSN: 2069-0932, E-ISSN: 2066-1061
© 2013 Pro Universitaria
www.orizonturi.ucdc.ro

The Use of Simple Regression in Macroeconomic Analysis

Constantin ANGHELACHE1, Ligia PRODAN2

1ArtifexUniversity/Academy of Economic Studies, Bucharest
2Faculty of Finance, Banking and Accountancy, “Dimitrie Cantemir” Christian University/Academy of Economic Studies,
Email: prodanligia@yahoo.com

Abstract This article shows the evolution of the main macroeconomic indicators of results, Gross Domestic Key words:
Product correlated with variation of final consumption in our country in the years 1990 to 2011. The Gross Domestic
values of the two macroeconomic indicators have been deflated using the consumer price index with Product, final
fixed basis, considering the first year of the series, 1990, as a reference. The evolution of the Gross consumption, simple
Domestic Product is influenced to a large extent by changes of final consumption. To achieve the regression, model,
correlation between the two macroeconomic indicators, article proposes using the linear regression correlation, variable
model, model is the basis of many micro and macroeconomic analysis. In this regression model is
considered the gross domestic product as outcome variables and the final consumption as the variable JEL Codes:
factorial. C22, O11

1. Introduction Y = the dependent (outcome) variable: The Gross

The linear regression model involves identifying the
variables for defining the model and establishing the
residual variable. For the analysis of time series we are
using a time function which, in essence, it is all of the
regression line with a time variable (t). The purpose of
the use of the regression model is that to obtain the
parameters corresponding to a set of variables made by
analyzing the dependence of the variables for the data
series that are recorded at the level of the statistical
units of population for a time period or a moment, and
for highlighting the dependence between variables in a
certain period of time [1].
2. The Use of Simple Regression
Macroeconomic Analysis
In theoretical analysis the dependence between
variables is stochastic. It is necessary to consider the
residual variable in a model like this. The other factors
that are influencing the variable output are grouped in
residual variable.
The form of the model of simple linear regression is:
Y = β0 + β1 X1 + ε (1)
The variables of the model, for the featured example,
are:
Domestic Product (mil. lei in comparable prices);
X1 = the independent (factorial, predictive) variable: The
Finial Consumption (mil. lei in comparable prices);
ε = error, random (residual) variable; the variable that
adds the influence of other variables on the Gross
Domestic Product but are not express specified in the
model. The ε variable expresses the deviations
between the empirical values and the model estimated
values.
The parameters of the simple linear regression model,
also known as regression coefficients, are:
β0 = the intercept- shows the average value of the Y
value when X=0;
in β1 = the slope - shows the average variation of the
dependent variable Y, at a absolute variation with one
unit of X variable, which means the variation of the Y
variable is proportional with the variation of the X
dx
variable: β1 = (2)
dy
When establishing the regression equation witch best
approximates the real shape of the researched
dependence a series of statistical procedures are used.
The easiest way to determine the regression equation
is the graphical representation of the correlated
statistical distributions (correlogram) which sometimes
suggests the forming of a link.

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 Knowledge Horizons - Economics
Volume 5, No. 4, pp. 168–172, © 2013 Pro Universitaria

Table 1. The evolution of the Gross Domestic Product

The term “Regression” was first used by Francis Galton and Final Consumption of Romania in the period 1990 -
(1822-1911) in a paper from 1886 witch studied the 2011 (mil. lei in comparable prices)
connection between the height of fathers and the height
of sons. He noticed that from parents taller than the Gross Domestic
Final Consumption
group average height the children are born smaller than Product
Year (comparable prices)
their parents and from parents with height less than of (comparable
million lei
the group average the children are born with height prices) million lei
greater than parents. So there is a regression (“return”) 1990 85.79 67.95
1991 81.57 61.89
towards the average value. Generally, is about the
1992 71.88 55.35
modulation of the dependence relation of a variable of
1993 67.08 51.01
one or more independent variable, analogue to the 1994 70.38 54.37
case of the dependence of a phenomenon of one or 1995 77.12 62.72
more factors. 1996 83.82 69.28
The term “correlation” is used to define the 1997 76.47 66.09
interdependence (connection) between the observed 1998 71.03 64.13
variables in statistical population. The term is synonym 1999 71.13 63.13
with statistical regularity or statistical connection. The 2000 71.92 61.96
root of the word “correlation” comes from Latin 2001 77.70 66.19
(corelatio = in relation to) and was used in biology by 2002 82.55 69.03
Charles Darwin meaning “collective variable”. In 2003 93.00 79.52
statistical study was used by Galton meaning mutual 2004 104.15 88.86
relations between certain characteristics. 2005 111.60 96.96
In the analysis made about the factors that determine 2006 124.92 106.87
the variation of the Gross Domestic Product, we began 2007 143.82 119.25
from the specific components of the final production use 2008 165.00 134.93
method (the expenditure method), considering is a 2009 152.15 122.74
2010 149.86 120.13
source of meaningful information on the main
2011 150.59 118.07
correlations that influences the es
So, according to the calculation method mentioned Source: Statistical Yearbook of Romania, Gross Domestic
before, the Gross Domestic Product means the Product, categories of uses, NIS, Bucharest, 1991-2012
summing of the components that express the use of
goods and services which makes the final production The values of the two macro economical indicators
as: were deflated using the consumer price index (used by
the National Statistical Institute to calculate the inflation
GDP = FC + GCF + NEX (3) rate in Romania) witch catches the evolution of the
prices of final goods and services purchased by the
Where: FC = Final consumption; population (food supplies, non-food and services). The
GCF = Gross capital formation; fixed base consumer price index was used considering
NEX = Net export. the first year of the series, year 1990, as reference
base.
To build a linear regression model we defined the final For the making of the analysis regarding the correlation
consumption as independent variable while the value of between the two macro economical indicators
the Gross Domestic Product was considered a presented in the table above is necessary to identify the
dependent variable. specific features aiming the evolution of item
Starting from the elements mentioned above we wanted considered in the specified time interval. For this, with
to identify the country wide relation between the the help of Eviews 7.2 software we studied in the first
evolution of the final consumption (regarded as a sum step the individual development of the two indicators.
of the private and public consumption) and the variation So, the analysis of the evolution of the Gross Domestic
of the Gross Domestic Product. For this we used the Product of Romania from 1990 to 2011 allowed
simple linear regression as method of analysis. The two obtaining the following information and graphic material:
indicators can be shown in synthetic form as follow:

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 Knowledge Horizons - Economics
Volume 5, No. 4, pp. 168–172, © 2013 Pro Universitaria

flattening or sharpening of a distribution. Kurtosis test

Figure 1. The evolution of the Gross Domestic Product
of Romania in the period 1990-2011 (mil. lei in
comparable prices)
As can be seen both from the development of the
researched data series and the graphic, in the period
considered the Gross Domestic Product registered
small fluctuations with small increase and decrease, but
overall there is an increase from one year to another.
With the help of the software Eviews 7.2 we conducted
a series of statistical tests designed to insure an
accurate picture of the evolution of our country's Gross
Domestic Product in the period under review.
value being less than 3 mean that we have a platikurtic
distribution, flatter than normal distribution with values
scattered over a wider range around the average. The
probability for extreme values is lower than that of a
normal distribution.
The Jarque-Bera test takes into account both the
asymmetry and the flattening coefficients and examine
whether the empirical distribution can be approximate
with a normal distribution. The critical value of Jarque-
Bera test for statistical significance level of 5% is 5.99.
Since the calculated value of Jarque-Bera test is less
than the critical value we could say that we have
approximately the normal distribution of this indicator.
A similar analysis can be performed for the final
consumption trends during 1990-2011. The main
information obtained from the analysis performed using
the software Eviews 7.2 can be presented as follows:

Figure 3. The evolution of the Final Consumption of

Romania in the period 1990-2011 (mil. lei in
comparable prices)
The graphical representation of final consumption
allows us to conclude that the final consumption
indicator showed small fluctuations, with small
increases and decreases, but overall there is an
Figure 2. Statistical tests performed on Gross Domestic
increase from one year to another. Similarities like
Product
those observed for the development Gross Domestic
Thus, it is noted that the average value of this indicator Product is also found in the evolution of final
for the period 1990 - 2011 is 99.25 million lei, with a consumption.
range between a minimum of 67.08 million lei recorded
in 1993 and a peak of 165 million lei in 2008.
Skewness test is used to analyze distribution of the
series of data to indicate the deviation of the empirical
distribution in report to a symmetrical distribution
around the average. Thus, we can say that the
distribution of values of Gross Domestic Product for the
period considered is not perfectly symmetrical. Since
Skewness test value is greater than 0 we can say that
the distribution is tilted to the left, with more extreme
values to the right.
Figure 4. Statistical tests performed on Final
Kurtosis-test is an indicator used in the analysis of the
Consumption
distribution of data series to indicate the degree of
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 Knowledge Horizons - Economics
Volume 5, No. 4, pp. 168–172, © 2013 Pro Universitaria

With the help of Eviews software we determined the have undergone research on the data series that
variation range of final consumption is between 51.01 includes the values of the two indicators in the period
million lei (minimum value-recorded in 1993) and 1990-2011. They were processed using the software
134.93 (maximum value-recorded in 2008). Also, we package Eviews 7.2. The estimation method defined in
obtained the average value of the indicator, 81.83 this program is the method of least squares.
million lei. The results obtained using Eviews software is as
As can be seen, values of Skewness and Kurtosis tests follows:
allow us to state that deemed distribution is not
perfectly symmetrical:
- Skewness test value being greater than 0 we can say
that the distribution is tilted to the left, with more
extreme values to the right;
- Kurtosis test value being lower than 3 we can
establish we have a platikurtic distribution, flatter than a
normal distribution with values scattered over a wider
range around the average.
Jarque-Bera test value is less than the critical value of
5.99 for a statistical significance of 5%, which means
that we have an approximately normal distribution of
this indicator.
From the analysis it can be concluded that the evolution
of the two indicators is similar, with steady growth in the
analyzed period. Also, it is noted that the values of the
Figure 6. The regression model’s characteristics
tests performed on the two sets of statistical data is
very similar. Based on these results, we can say that
To interpret the results obtained using linear regression
the Gross Domestic Product and the final consumption
model is necessary to determine if this model can be
are highly interdependent.
considered correct, and the results that it offers can be
To confirm this statement we realized the chart point
used in real macroeconomic analysis:
cloud of the pairs that consist of the Gross Domestic
• R-squared coefficient of determination, which shows
Product values and the corresponding final
the validity of the chosen model to explain the variation
consumption values. This graphical representation is as
of y, in this example has a value close to 1, indicating
follows:
that the model is well chosen, final consumption, X,
explains the variation of the Gross Domestic Product,
Y, in a ratio of 98.24%;
• Between the two indicators there is a significant
positive linear dependence since the slope of the
regression line is positive;
• Also, the validity of the regression model is confirmed
by the zero level of risk reflected by the value of the
Prob (F-statistic) test;
• Between the statistic value of F and t, which
correspondst 2 =toFthe regression slope we can check the
relation
Based on the above, we can consider the regression
Figure 5. The correlogram Gross Domestic Product vs. model that describes the correlation between the Gross
Final Consumption Domestic Product and the final consumption as being a
good choice as one that accurately reflects the real
As we can see from the chart above, the pairs of points evolution of the two macroeconomic indicators. As a
follow a straight path, so it is possible to analyze the result, the regression function is: GDP = -0,96 + 1,22FC
phenomenon investigated using the simple linear As can be seen, the final consumption is an extremely
regression model. Based on the graph we can say that important factor for the development Gross Domestic
between the Gross Domestic Product and the final Product. Thus, an increase of one million lei for final
consumption, there is a direct and linear form link. consumption will get an increase by 1.22 million to the
To analyze the correlation between the evolution of Gross Domestic Product.
Gross Domestic Product and final consumption we
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 Knowledge Horizons - Economics
Volume 5, No. 4, pp. 168–172, © 2013 Pro Universitaria
The negative value of the constant term shows that the
variables that were not included in the econometric
model have a negative effect on the development
Gross Domestic Product.
3. Conclusions
Based on all the above analysis, we can say that Gross
Domestic Product is significantly influenced by the final
consumption.
This is one corresponding economic reality of Romania
in the last twenty years since the Romanian economy
was based almost exclusively on stimulating
consumption and less on promoting a correct
investment policy.
Notes:
[1] Anghelache, C., G.R. Pagliacci, M., Prodan, L.
(2013). "Model for macroeconomic-Analyze based on
the regression function", Romanian Statistical Review,
no. 1, pp. 5-30.
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