Lecture 10

Functional Forms of Regression Models

(MS Business Analytics

I A Weekend)

Instructor: Dr. Abdul Sattar

Management Studies
Bahria University Islamabad
 Contents
Linear - Linear Model
Linear - Log Model
Log - Linear Model
Log - Log Model
Model Selection Criteria
Numerical Examples
Linear – Linear Model
Both regressand (DV) and regressor (IV)
appear at level
such model is also called lin-lin model or level-
level model
Y  1   2 X  

Interpretation: Unit change in regressor causes β2

unit change in regressand
Linear – Linear Model
Consider
Y  1   2 X  
On the basis of hypothetical data, empirical
findings are:
Y  1.5  0.15 X
Interpretation: When X increases (decreases) by
one unit then Y will increase (decrease) by 0.25
unit.
Linear – Log Model
Dependent variable appears at level and
independent variable with log form
such model is also called lin-log model or
level-log model
Y  1   2 ln X  

Interpretation: Percentage change in regressor

causes β2 unit change in regressand
Linear – Log Model
Consider
Y  1   2 ln X  
On the basis of hypothetical data, empirical
findings are:
Y  1.5  0.15 ln X
Interpretation:When X increases (decreases)
by one percent then Y will increase (decrease)
by 0.25 unit
Log – Linear Model
Dependent variable appears with log form and
independent at level
ln Y  1   2 X  
This model is also called log-lin model or log-
level model
Interpretation: Unit change in regressor causes
β2 percent change in regressand
Log – Linear Model
Consider
ln Y  1   2 X  

On the basis of hypothetical data, empirical

findings are: ln Y  2.5  0.25 X

Interpretation: When X increases (decreases) by

one unit then Y will increase (decrease) by 0.25
percent
Log – Log Model
Both dependent variable and independent
variable appear in log form
ln Y  1   2 ln X  
This model is also called log-log model or
double log model or growth model
Interpretation: Percentage change in regressor
causes β2 percent change in regressand
Log – Log Model
Consider
ln Y  1   2 ln X  

On the basis of hypothetical data, empirical

findings are:
ln Y  1.5  0.15 ln X
Interpretation: When X increases (decreases) by
one percent then Y will increase (decrease) by
0.25 percent
Model Selection Criteria
From these given models, a model will be
selected whose R square is relatively high subject
to satisfying all theoretical conditions!

Lin-Lin Model: Y  1   2 X  
Lin-Log Model: Y  1   2 ln X  
Log-Lin Model: ln Y  1   2 X  
Double Log Model: ln Y  1   2 ln X  
 Exercise
For Supplementary Reading, please see:

Basic Econometrics by Gujarati, 5th

Edition (Chapter No. 6)
Pages: (154-166)
Thank you