Most economic majors have to spend their second or third year of college completing an econometrics project and writing a paper based on their findings. Save yourself from long hours spent in front of a computer and read these tips on how to do a painless econometrics project.
For this tutorial, we’re going to see if Okun’s Law holds true in the United States. Okun’s Law states that there is a relationship between the percentage growth of real output (measured by GNP) and change in unemployment rate. The model we’ll be using is Yt = b1 + b2 Xt
Where Yt is the change in unemployment rate, Xt is the change in percentage growth as measured by GNP. b1 and b2 are the parameters we’ll be trying to measure.
- Obtain data that states the United States unemployment rate and GNP in Excel. You can get this from Quarterly Economic Data.
- Open the file in Excel and look for the information you need. a. First, find the Y variable. Remember that Y stands for the change in the unemployment rate. This is usually placed in a column with a label UNRATE, or Column A. By looking at this column, you will see that the data on quarterly unemployment rate ranges from April 1947 to October 2002. Write down the cell numbers as this will be important later.
b. Find the X variable in the column marked GNPC, or Column E. This column has information gathered from April 1946 to October 2002. As before, write down the cell numbers.
- Now that you have spotted the data you need, you can now use Excel to compute for the regression coefficients. If your professor does not restrict you to using a particular program to do your analysis, it’s better for you to stick to Excel. Excel is very useful for doing simple regression and you are more likely to use Excel when you get a job after college. Proficiency in Excel is always a useful skill to have.
- Go to Tools and look for Data Analysis in the drop-down menu. Data Analysis does not normally come with Excel, so you might have to install the Data Analysis Tool Pack if you don’t see it there.
- Once Data Analysis has been selected, you will be presented with a menu that has choices like F-Test and Covariance. Select Regression.
- Fill in the unemployment rate data cells on the Input Y Range.
- Fill in the percentage change in GDP data on the Input X Range.
- Name the page where the regression results will appear. Select New Worksheet Ply and type in Regression (or your title of choice). When everything has been filled up, click OK.
- A tab called Regression should appear on the bottom of your screen. You should get an intercept coefficient between 1 and 0 and an x variable coefficient between -1 and 0.
- Finally, estimate the intercept coefficient and the X coefficient. They are located in the row labeled Intercept and a column labeled Coefficient. The slope coefficient should be located in a row labeled X Variable 1 and in the column Coefficient. Write down the figures you see as this will be used for further analysis.