Assignment II , ABA3692 Semester II, 2023

Question 1

i) Hypothesis Test

To conduct a hypothesis test, we need to set up the null and alternative hypotheses. In this case, the
null hypothesis (H0) is that the variance of the process is equal to or less than 6, and the alternative
hypothesis (Ha) is that the variance is greater than 6.

The test statistic we will use is the chi-square statistic, which follows a chi-square distribution. We will
compare the test statistic to the critical value from the chi-square distribution to determine if we reject
or fail to reject the null hypothesis.

To calculate the test statistic, we need to calculate the sample variance and the degrees of freedom. The
sample variance can be calculated using the formula:

s^2 = (1/n) * Σ(xi - x̄)^2

where n is the sample size, xi is each individual data point, and x̄ is the sample mean.

For the given sample data: 115 116 119 120 121 120 122 119 123 117 116 120 113 118 120 115, the
sample mean (x̄) is 118.25.

Next, we calculate the sample variance (s^2):

s^2 = (1/16) * [(115-118.25)^2 + (116-118.25)^2 + ... + (120-118.25)^2 + (115-118.25)^2]

= 5.9375

The degrees of freedom (df) for the chi-square distribution is given by (n-1), where n is the sample size.
In this case, df = 15.

Using the chi-square distribution table or a statistical software, we find the critical value for a one-tailed
test at the 0.05 level of significance with 15 degrees of freedom is approximately 24.996.

Now, we can calculate the test statistic:

chi-square = (n-1) * (s^2) / σ^2

= 15 * 5.9375 / 6

= 14.84375

Since the test statistic (14.84375) is less than the critical value (24.996), we fail to reject the null
hypothesis. This means there is not enough evidence to conclude that the variance of the process
exceeds 6. Therefore, no corrective action needs to be taken.

ii) Confidence Interval Estimate for Standard Deviation

To develop a confidence interval estimate for the standard deviation, we can use the chi-square
distribution. The formula for the confidence interval is:
[√((n-1)*s^2 / χ^2_upper), √((n-1)*s^2 / χ^2_lower)]

where n is the sample size, s^2 is the sample variance, χ^2_upper is the upper critical value from the chi-
square distribution, and χ^2_lower is the lower critical value.

For a 95% confidence interval, we need to find the upper and lower critical values from the chi-square
distribution with (n-1) degrees of freedom. Using a chi-square distribution table or a statistical software,
we find the upper and lower critical values to be approximately 27.488 and 6.262, respectively.

Plugging in the values, we get:

[√((16-1)*5.9375 / 27.488), √((16-1)*5.9375 / 6.262)]

= [1.932, 3.932]

Therefore, we can say with 95% confidence that the standard deviation of the process falls within the
range of 1.932 to 3.932.

Question 2

i) Method used to calculate the CPI

The Consumer Price Index (CPI) is calculated using the Laspeyres formula, which is a fixed-weight index.
This means that the quantities of goods and services in the basket are fixed and do not change over
time. The Laspeyres formula calculates the price changes of these fixed quantities over time.

The steps involved in calculating the CPI are as follows:

Select a base period: A base period is chosen as a reference point for comparison. The prices and
quantities of goods and services in the base period are used as the base values.

Determine the basket of goods and services: A representative basket of goods and services is selected to
reflect the average consumption patterns of households. This basket includes items such as food,
housing, transportation, healthcare, and education.

Collect price data: Price data is collected for each item in the basket at regular intervals. This data is
obtained from various sources, such as retail stores, service providers, and government agencies.

Calculate item price relatives: The price relatives are calculated by dividing the current price of each
item by its price in the base period. This gives the percentage change in price for each item.

Calculate item expenditure weights: The expenditure weights represent the importance of each item in
the total expenditure of households. These weights are based on household expenditure surveys.

Calculate the Laspeyres index: The Laspeyres index is calculated by multiplying the price relatives by the
expenditure weights for each item, and then summing them up. This gives the overall percentage
change in prices for the basket of goods and services.

Calculate the CPI: The CPI is obtained by dividing the Laspeyres index by the price index of the base
period and multiplying by 100. This gives a measure of the average price change relative to the base
period.
 ii) Trend analysis for the Namibia CPI for 2022 and 2023

To provide a brief trend analysis for the Namibia CPI for 2022 and 2023, we would need access to the
specific monthly Namibia CPI Bulletins produced by the Namibia Statistics Agency. These bulletins
contain the necessary data to analyze the trends in the CPI.

However, based on general principles, a trend analysis involves examining the direction and magnitude
of changes in the CPI over a specific period. Here are some steps you can follow to conduct a trend
analysis:

Obtain the monthly CPI data for Namibia for 2022 and 2023 from the Namibia Statistics Agency.

Plot the CPI values on a line graph to visualize the trend over time. This will help identify any patterns or
fluctuations.

Calculate the percentage change in the CPI between consecutive months to determine the monthly
inflation rate. This will indicate the rate at which prices are changing.

Calculate the average monthly inflation rate for each year (2022 and 2023) to assess the overall trend.
This will provide an indication of whether prices are generally increasing, decreasing, or remaining
stable.

Analyze any significant changes or events that may have influenced the CPI during the period under
review. This could include factors such as changes in government policies, economic conditions, or
global events.

Summarize the findings of the trend analysis, highlighting any notable patterns, fluctuations, or trends
observed in the Namibia CPI for 2022 and 2023.

Please note that without access to the specific Namibia CPI data, it is not possible to provide a detailed
trend analysis. It is recommended to refer to the monthly Namibia CPI Bulletins produced by the
Namibia Statistics Agency for a comprehensive analysis of the CPI trends in Namibia for 2022 and 2023.

Question 3

i) Estimating Simple Linear Regression Models

To estimate the simple linear regression models, we need to find the coefficients that minimize the sum
of squared residuals. The general equation for a simple linear regression model is:

Y = β0 + β1*X + ε

Where:

Y is the dependent variable

X is the independent variable

β0 is the intercept

β1 is the slope

ε is the error term

We can estimate the coefficients using the method of least squares. The steps are as follows:

Calculate the means of Y and X.

Calculate the deviations of Y and X from their means.

Calculate the sum of the products of the deviations.

Calculate the sum of the squared deviations of X.

Calculate the estimated slope (β1) using the formula:

β1 = (sum of products of deviations) / (sum of squared deviations of X)

Calculate the estimated intercept (β0) using the formula:

β0 = mean of Y - (β1 * mean of X)

Using this method, we can estimate three simple linear regression models for the given data.

ii) Evaluating the Best Model

To determine the best model among the three estimated simple linear regression models, we need to
consider the following criteria:

Coefficient of determination (R-squared): It measures the proportion of the variance in the dependent
variable that can be explained by the independent variable(s). A higher R-squared indicates a better fit.

Residual analysis: We need to examine the residuals to check for patterns or deviations from
assumptions. A model with smaller residuals and no patterns is preferred.

Significance of coefficients: We need to test the significance of the estimated coefficients using
hypothesis testing. A significant coefficient indicates a relationship between the variables.

By evaluating these criteria, we can determine the best model among the three estimated simple linear
regression models.

iii) Improving the Best Model

To improve the best simple linear regression model, we can consider the following approaches:

Include additional independent variables: If there are other variables that may have an impact on the
dependent variable, we can include them in the model to improve its explanatory power.

Transform variables: Sometimes, transforming the variables (e.g., taking logarithms or square roots) can
improve the linearity and reduce heteroscedasticity.

Consider interaction terms: If there are interactions between the independent variables, including
interaction terms can capture their combined effect on the dependent variable.

Check for outliers: Outliers can have a significant impact on the regression results. Identifying and
removing outliers can improve the model's fit.

By implementing these strategies, we can enhance the best simple linear regression model.
 iv) Spurious Regression

Spurious regression refers to a situation where two or more variables appear to be significantly related,
but in reality, they are not causally linked. It occurs when both the dependent and independent
variables are non-stationary and have a common trend. In such cases, the regression results may show a
significant relationship, even though there is no true causal relationship between the variables.

To determine if the results in part (i) are spurious, we need to check if the variables are stationary and
do not have a common trend. If the variables are non-stationary and have a common trend, the results
may be spurious. However, without further information about the variables and their characteristics, it
is not possible to definitively determine if the results are spurious.

To avoid spurious regression, it is important to ensure that the variables are stationary and do not have
a common trend. This can be done by conducting appropriate tests for stationarity, such as the
Augmented Dickey-Fuller (ADF) test.

Motivate the results by evaluating the criteria mentioned earlier and considering the characteristics of
the variables.