Econometrics Project

privateized intake Expenditures, Personal Income, and CPI 1980 2011 April 24, 2010 overcharge The goal of this paper is to estimate the blood between personal utilisation and personal income among all Ameri washbasins over the past 30 years. The information includes yearly records for the four variables between the years 1980 and 2011. I become analyzed this data using the Ordinary Least Squ ars Method and ran a reasoning backward analysis in place to observe the descent between my variables.In my model, I accommodate used Real Personal Consumption Expenditures (PCE) as my independent variable, art object the dependent variable is Real useable Personal Income Per-Capita. As well, I included two explanatory variables in my model which are the Consumer expenditure baron (CPI) and a Coincident advocator. The model finds a positive relationship between personal custom expenditures and personal income. It also shows that inflation is positively related to the independ ent variable of personal usage.However the model demonstrates that there is an insignificant relationship between personal consumption and the Coincident Index. We can solve that personal income has an nucleus on personal consumption and that there is a positive correlation between these two variables. Therefore, in general, we can contain according to this model that as personal income increases, personal consumption also increases. 1. Introduction Our economy is an ever-changing system that is affected by an interminable number of factors. Some of these factors include personal consumption, personal income, and inflation.I digest chosen to look at how these factors may exploit one another inside the American economy. More specifically, I have chosen to research the influence of income, inflation, and the Coincidence Index on Americans consumption expenditures. I see that individuals consumption expenditures may vary based on two main factors A change in these individual s income and a change in inflation. Many conceptualise that as income increases, people will have to a greater extent and will because drop much silver and consume more.Some research suggests that larger menage wealth is associated with higher personal consumption (Slacalek, 2009). In terms of inflation, whatsoever theories suggest that as prices rise and rates of inflation create incertitude for the future, people will lower their consumption expenditures (Springer, 1977). However, since prices are higher, the total Personal Consumption Expenditures may still increase along with inflation. 2. Theory and assumption In March, 2011, personal income increased by 0. 5 percent, while personal consumption expenditures for Americans increased by 0. 6 percent (Cohen, 2011).Based on this information, it can be leave offd that the percentage increases for these variables increased nearly proportionately. I believe that this is not just a proportion and that these variables actuall y share a relationship. Although this data is only for one month of one year, I anticipate that this relationship would stay true if these statistics were to be taken over a period of several years. I believe that as Real useable Personal Income Per-Capita increases and individuals make more funds, that people will spend more and consume more, meaning that PCE would increase.Since people would be making more money I expect that since they are more capable of spending money that they will indeed spend and consume more. I also presuppose that CPI will have an effect on personal consumption. CPI, which is an extension of inflation, is an increase in prices in an economy relative to the money open in that economy. Since inflation means that you must pay more for the kindred goods, I hypothesize that as inflation increases, and prices rise, people will spend less, and therefore PCE will decrease. I also theorized that as the Coincident Index increases, PCE would also increase.This is because I believe that if the Coincident Index, which describes current economic conditions, goes up, then people will consume more while economic conditions are better. 3. Empirical Model and Data Using a multiple fixing model, I estimated the relationship among my time-series data in order to learn more about my hypotheses. C = ? 0 + ? 1 *RDPI + ? 2*CPI + ? 3*CI C = -3. 540 + 3. 339(RDPI) +6. 888(CPI) +2. 315(CI) + ei Where C= Personal Consumption Expenditures RDPI= Real Disposable Income Per-Capita CPI= Consumer Price Index (Inflation) CI= Coincident IndexUsing Tinn-R, I came up with the following results. The Coefficients for this model are as follows Estimate Std. Error t value Pr(t) (Intercept) -3. 540e+03 3. 383e+02 -10. 466 3. 49e-11 *** RDPI 3. 339e-01 3. 903e-02 8. 555 2. 68e-09 *** CPI 6. 888e+00 3. 061e+00 2. 250 0. 0325 * CI 2. 315e+00 4. 713e+00 0. 491 0. 6271 As can be observed through these results, the t-values for both RDPI and CPI are greater than 1. 96. The refore, both of these variables are statistically significant and consequently have an effect on Personal Consumption Expenditures.However, the t-value for the coincident index is not statistically significant, which means that we cannot conclude that it affects consumption. It can be assumed through this regression model that as personal income increases by 1 unit, consumption increases by 3. 339 units. As well, as PCE increases by one unit it can be assumed that PCE will increase by 6. 888 units. Therefore, I can conclude that my hypotheses regarding the relationship between consumption and income and consumption and inflation are exact according to me regression model. However, these results may vary if other factors were to be considered in my model.As well, the results may be slightly off due to including the insignificant factor, the coincidence index. 4. Conclusion In conclusion, I have found the majority of my hypotheses to be true. I have found that both Personal Income an d Inflation have an effect on Personal Consumption Expenditures and that both income and inflation have a positive relationship with consumption. However, based on my model, the Coincident Index does not share a relationship with PCE. I believe that this supposal of mine may be incorrect because the economic conditions of an conomy may not play a significant enough role on individuals consumption expenditures in order for this model to show that a relationship exists. merely research would need to be conducted in order for me to examine this relationship more closely. For example, other factors such as personal saving may influence personal consumption as well. In order to benefit more clear and accurate results in the future, I would conduct more models, using more economic variables related to consumption in order to see what other potential factors may influence Personal Consumption Expenditures.References * Amadeo, Kimberly. How Inflation Affects Your Life The Impact of Infl ation on Prices and Treasury Bonds. US Economy and Business US Economic Indicators US Economic News. N. p. , n. d. Web. 24 Apr. 2012.