Econmet Paper

Christian benedick B. ARGA 11027614 AE-FIN A t to each oneing on the Effect of Inflation, exone crop Income, and Energy Use to the fossil kindle Consumption in the Philippines An Empirical physical composition Presented to The Faculty of the School of Economics De La S on the wholee University In Partial Fulfillment of the Requirements in ECONMET Submitted by Christian benedick B. Arga 11027614 Submitted to Dr. Cesar Rufino declination 14, 2012 1 Christian benedict B. ARGA 11027614 AE-FIN add-in of Contents Introduction I. II. III. IV. solid ground of the Study assertion of the Problem Objectives of the Study bena and LimitationsReview of relate Literature I. II. III. Inflation cryst either last(predicate)ize Income Energy Use working(a) material I. II. in eonian Descriptions A-Priori Expectations Methodology I. II. Data pull together Model Specifications Empirical Results and reading material I. II. inconsistent digest Critical Assumptions 2 Christian benedick B. ARGA 11027614 AE-FIN 1. Multicol unidimensionality 2. Homoscedasticity 3. Non-auto correlativity Remedial broadsheets and change Estimated econometric Model I. II. Remedial Measures Adjusted econometric Model outcomes and Recommendations Bibliography Data Presentation 3 Christian benedict B.ARGA 11027614 AE-FIN Introduction I. Background of the Study In this empirical paper, the police detective aims to know the rears of displace income, rising prices and aught phthisis on the wasting disease of fogey renders in the land. This project exit allow the student to routine un wish econometric impressions and a variety of tests to visualize the positionors that get out allow him a concrete approach on the subject. Fossil terminate as defined by encyclopaedia Britannica is any of a socio-economic elucidate of materials of biologic origin occurring within the Earths crust that understructure be utilise as a come of zero. It is a hydrocarbon containing nat ural resource that is non acquired from plants or animals. Fossil can is a familiar term for buried combustible geologic deposits of organic materials, formed from decayed plants and animals that occupy been converted to crude oil, combust, natural gas, or heavy oils by exposure to alter and pressure in the earths crust everyplace hundreds of millions of years. The depletion of dodo burn has been an underlying fuss in our economy. Un uniform expertness climax from hydroelectric power plants or windmills, the energy acquired from fogy send away cannot be re-create and is gone forever. Christian benedict B. ARGA 11027614 AE-FIN II. takement of the Problem As express earlier, dodo fuel is a non-renewable energy source. both countries in the world argon act their go around to conserve their respective resources. The hassle in this empirical project is that whether diverse factors much(prenominal) as pretension, give notice income, and energy give of the co untry has an effect on its enjoyment of dodo fuels. III. Objectives of the Study in that location be various objectives to this study. First is to queue up out whether ostentation, net income, and energy use has an effect on a countrys usage on dodo fuels.Second, is to educate the readers of this paper which of the in bloodsucking uncertain(p)s affects the employment of fogy fuel the most. And lastly, this paper aims to enforce the various littleons well-educated in class to show the effects of the chosen multivariates on the fogey fuel usance. 5 Christian benedict B. ARGA 11027614 AE-FIN IV. Scope and Limitations The entropy gathered that was use in this project was confine and only allowed the researcher to gather up to 35 observations because some variables lack set for previous years. Because of this reason, the sample size is comparatively small and cannot be comp bed to separatewise countries for reference.Review of Related Literature I. Inflation Infla tion is defined by Inve pulleyedia, as the rate at which the general level of prices for totals and ser sins is rising, and, subsequently, buying power is falling. Central banks attempt to stop severe inflation, along with severe deflation, in an attempt to keep the excessive reaping of prices to a minimum. Inflation has affected the rate of many products at which they atomic number 18 take aimd. For this project, we depart unwrap out if inflation has an effect on the inlet of fogy fuels. We indigence to scratch out if people would 6Christian Benedict B. ARGA 11027614 AE-FIN consume to a greater extent or little if the prices of fossil fuel has been affected by inflation. II. Net Income Net income, as learned in the students bloodline subjects, is the money left after subtracting expenses and separate deductibles like taxes and interest to the total revenue. We allow observe if net income has an effect on fossil fuel outlay. Maybe, a higher(prenominal) net income may learn the consumer to consume more(prenominal) or perhaps, a reject net income may get the consumer to find new(prenominal) sources of energy which may be cheaper than fossil fuel. III. Energy UseFossil fuel intense powers our vehicles and industries, heats and cools our buildings, and runs appliances. It besides produces electricity that we use for all sorts of purposes, such as lights and computers. This is quite open-and-shut because as we consume more energy, the more fossil fuel we burn and vice versa. 7 Christian Benedict B. ARGA 11027614 AE-FIN Operational Framework I. Variable Description The pretence entrust contain the following components, the dependant variable and the self-directed variables. The sovereign variables atomic number 18 those that are exogenous in nature. It is not affected by any variable contained within the amaze.The mutualist variable, on the opposite hand, is endogenous in nature. It is affected by all the in restricted variables in t he mannequin. For this project, there entrust be three in low-level variables namely inflation, netincome, and energy darn the dependent variable ordain be fossil. defer 1 Variable Description This is the independent variable. This is the fossil fossil fuel outgo of the Philippines from the years 1977 until 2011. It is explicit in percentage. 8 Christian Benedict B. ARGA 11027614 AE-FIN This is a dependent This is GDP variable. measured inflation by the deflator from 1977 up to 2011.This variable is expressed in the annual percentage. This is a dependent is the variable. This per annum total income of our country from 1977 until netincome 2011. We can serve that the information has disallow values. This is collect to the info universe in BoP expressed in US$. This is a dependent is the variable. energy yearly This energy of from the 1977 use of reasoneds and services Philippines until 2011. This variable 9 Christian Benedict B. ARGA 11027614 AE-FIN is expressed in ki lotonnes. II. A-Priori Expectations The A-Priori is a shiny justification before actual testing and analysis is done with the information. Given that the fossil fuel onsumption is the dependent/endogenous variable, we will take a look at the race of this with the independent/exogenous variables. This will be present tenseed in the plug-in down the stairs Table 2 A-Priori Expectations Endogenous Variable fossil Exogenous Variable family kindred Reason As inflation goes up, the prices of fossil fuel goes up too because, the phthisis of fossil fuel will be slenderized. People will try to find cheaper sources of energy and maybe renewable ones are a good try. inflation disconfirming 10 Christian Benedict B. ARGA 11027614 AE-FIN netincome imperious energy imperativeAs netincome step-ups, there will be more money to spend therefore it may affect the inhalation of fossil fuel autocraticly. People will campaign to buy more goods like nutriment which requires electricity t o cook. As energy consumption goes up, there will be more and more fossil fuel that will be consumed. Most of the worlds energy source comes from fossil fuels. therefore, as people run away to consume more energy, more fossil fuel is going to be ruin up. Methodology I. Data Gathered The selective information gathered has been acquired from the databank of the man Banks website. The data is from the Philippines dating back from 1977 until 2011.There are a total of 35 observations. This is payable to the reason that some of the variables lack data from 1976 and further back. So to keep the harmony of this project, only 35 observations per variable has been utilise. This is to agree that the 11 Christian Benedict B. ARGA 11027614 AE-FIN data is unbiased and comparable to each other. Presented in the table below is the data compendious from Stata12 II. Model Specifications The reversal dumbfound to be formed will be found on intuition, economic theories, conducted studies an d research materials think to the objectives of this paper.The independent variables chosen will all be affecting the dependent variable, profits, proportionately therefore, it is appropriate to use the lin-lin model or the linear-linear model. The estimated econometric model based on the A-priori medical prognosiss would look like this fossil=? 1 +? 2 inflation+? 3 netincome+? 4 energy+U i 12 Christian Benedict B. ARGA 11027614 AE-FIN Empirical Results and Interpretation I. Estimated econometric Model The summarization table earlier confirms that there are rattling a total of thirty-five observations for each variable.The data can therefore be regressed and is comparable for there are extend to numbers of observations per variable include in the estimated model. However, in order to determine the somebody contribution of each variable, the values should be in terms of the same unit of measurement. The model has been change into the Log-Log model so that the data is comparabl e to each other. Stata12 generated the scatty values. Using the Ordinary Least Squares relapse functionality of Stata12, the following table has been generated which will lead us to acquire our estimated econometric model 13 Christian Benedict B. ARGA 11027614AE-FIN The estimated model is now fossil=-2. 324895. 0168192inflation+. 0182493netincome+. 5711335energy+U i From doing the Ordinary Least Squares regression, we are in genuineity looking at the p-values and the r- form values. The pvalue will enounce us the significance of the variable while the r-squared will tell us the informative ability. The significant parameters in the data are the netincome, energy, and the constant. We could articulate that these parameters are significant because when the p-value generated by Stata12 is generated by two, the p value move below the required value of 0. 05. The r-squared of the data is at 0. 349 or 93. 49%. This tells us that this data explains that the data is a good fit for t he real world because it explains 93. 49% of the real world model. II. Variable Analysis Given the independent variable, fossil, and the independent variables, it is presumptuousness that for every 1 unit increase in inflation, fossil fuel consumption would go down by 0. 0168912%. This gives inflation a negative relationship with fossil fuel consumption and 14 Christian Benedict B. ARGA 11027614 AE-FIN thus matches with our A-priori expectation. Next, for every 1 unit increase in net income, fossil fuel consumption will go up by 0. 182493%. This satisfies our A-priori expectation that net income has a positive relationship with fossil fuel consumption. Energy is also turn up to give a positive relationship with fossil fuel consumption. This is given(p) by its coefficient of 0. 5711335. So this means that for every 1 unit increase in energy use, fossil fuel consumption goes up by 0. 5711335% which also satisfies our Apriori expectation. at once for the constant, which has a coeff icient of 2. 324895, tells us that if zero happens with inflation, net income, and energy use, fossil fuel consumption save goes down by 2. 324895%.Although it is a fantasy that there will nothing happen with inflation, net income, and energy, there may be missing factors which were not included in this project. III. Critical Assumptions Classical linear regression models (CLRM) fork over three searing assumptions ? non-multicollinearity, homoscedasticity and nonauto coefficient of correlational statistics. Violations of these will each give up an unfavorable, un real and inaccurate outcome for the estimated model. It is for these reasons that the supra interpretation of the 15 Christian Benedict B. ARGA 11027614 AE-FIN model could not be used yet to conclude anything regarding the consumption of fossil fuel. . Multicollinearity, as defined by Penn State University, is an event whenever two or more of the predictors in a regression model are moderately or passing correlated. T o test for multicollinearity, the Variable-Inflating agentive role will be used. Shown below is the upshot generated by Stata12 There is multicollinearity within the model if the soused Variance-Inflating Factor is greater than 10. From the result generated by Stata12, the Mean VIF is 1. 08. This value is very far from 10 therefore, the model does not possess the task for multicollinearity. 2.Homoscedasticity Homoscedasticity means that the variance around the regression line is constant for all X values. Heteroscedasticity are most commonly present in cross-section data. When 16 Christian Benedict B. ARGA 11027614 AE-FIN heteroscedasticity is present, OLS is no longer the best linear unbiased estimate therefore, impact of this assumption is a far pointrel problem than the impact of non-multicollinearity. The researcher used Stata12 to test for homoscedasticity. Using the variables above for the test, Stata12 gave the result as follows Given that our H o P-Value (one-tailed) > 0. 5 constant variance and H A P-Value (one-tailed) < 0. 05 non-constant variance, Stata12 yielded a p-value of 0. 3693. Because the pvalue that was acquired is greater than 0. 05, we unsay the null speculation which states that our OLS has a constant variance and thus, is not suffering from heteroscedasticity. 3. Non-autocorrelation other critical assumption of the CLRM is non- autocorrelation. Autocorrelation is the correlation amid the past and present value of the data. This violation is commonly 17 Christian Benedict B. ARGA 11027614 AE-FIN present in time sequential publication data because of the sluggishness of economic variables.The forepart of autocorrelation will result to OLS not being the best linear unbiased estimate, although it is unflustered unbiased, constant, asymptotically normal and sufficient. Rsquared are overestimated, t-values F-values and x 2 are all wrong, all leading to counter-intuitive signs. The ascendant cause of all these errors will be coming from the standard errors being underestimated. This will result to wrong policy murder and misleading inferences. For this, the researcher used the Breusch-Godfrey LM test for autocorrelation. The result can be seen below Given that our H o P-Value (one-tailed) > 0. 5 no serial correlation and H A P-Value (one-tailed) < 0. 05 with serial correlation, Stata12 yielded a p-value of 0. 1119 which is greater than 0. 05 thus, we accept the null hypothesis that there is no serial correlation in the model. Although the data has been time-tested done the BreuschGodfrey LM test for autocorrelation, we still fill to test it 18 Christian Benedict B. ARGA 11027614 AE-FIN furthermore but now finished the Durbin-Watson d statistic test. The Breusch-Godfrey test has been done prototypic because it is preferred by statisticians for auto correlation testing.Now for the results of the Durbin-Watson The result for the Durbin-Watson yielded a value of 0. 6512995. As learned through the course, autocorrelation exists if the result is limiting to 0 or 4. The model possesses positive autocorrelation if the yielded d is c put up to 0. On the other hand, if d is closer to 4, the model experiences a negative autocorrelation. For the model to be autocorrelation free, the yielded d must(prenominal) be closer to 2 than 0 or 4. In this case, Stata12 returned a result which is closer to 0 which tells us that autocorrelation exists in the model.Because the assumption of no autocorrelation was violated, we must correct this by implementing remedial measures. 19 Christian Benedict B. ARGA 11027614 AE-FIN Remedial Measures and Adjusted Estimated Econometric Model I. Remedial Measure Because the model was tested with positive autocorrelation above, a remedial measure is needed to be implemented to correct this. For this problem, it will be corrected through the use of the Prais-Winsten estimation. It is a procedure meant to take care of the serial correlation of type AR(1 ) in a linear model.It is a modification of CochraneOrcutt estimation in the sense that it does not lose the first observation and leads to more susceptibility as a result. Stata12 could also agree this method whenever autocorrelation is detected through the Durbin-Watson testing. The results are as follows 20 Christian Benedict B. ARGA 11027614 AE-FIN After the application of the Prais-Winsten estimation, we acquired a transformed Durbin-Watson statistic of 1. 206692. This value is closer to 2 compared to the captain DW statistic of 0. 651299. Having this result, we can now inviolablely say that the model now is autocorrelation free.II. Adjusted Econometric Model With the execution of the Prais-Winsten, the r-squared and the adjusted r-squared has changed together with the coefficients of the variables. With the transformed r-squared of 0. 9994, it has improved from the previous r-squared of 0. 9349. This means that the model now explains 99. 94% of the real world variance. Bec ause of the Prais-Winsten transformation, we acquired new coefficients and thus we have our adjusted econometric model fossil=-2. 956624. 0344159inflation+. 0145774netincome+. 6412211energy+U i The same concept still applies with our previous econometric model.The relationships among the dependent variable and the independent variables seaportt changed so that means that it still meets our A-priori expectation. 21 Christian Benedict B. ARGA 11027614 AE-FIN Conclusion and Recommendations Now that the model with fossil fuel consumption as its dependent variable inflation, net income, and energy use as its independent variables, has now been empirically tested and that the concepts and skills that have been learned in class have been applied, it is now time to provision in the conclusions and recommendations about the subject matter.Fossil fuel as said earlier is a non-renewable source of energy. Once that it has been burned-over up, it can never be acquired again. Unlike hydroelectr ic and wind energy sources, these are slowly renewable through the resources provided by pose Nature. Also, the burning of fossil fuel damage the ozone layer and increases the amount of greenhouse gases. It has been proven earlier that the A-priori expectations have been met. First Id like to discuss the relationship of inflation and fossil fuel consumption. It is said above that fossil fuel consumption and inflation have a negative relationship.This means that whenever inflation goes up, the consumption of fossil fuel goes down. If the global economy wants to reduce the consumption of this non-renewable energy source and promote people to turn to other sources of energy other than this, taking advantage of the inflation may be a good idea. If fossil fuels prices like oil and coal have gone up due to the inflation, people may find it unimaginative to tack together to other sources of energy like solar, wind, or geothermal heat. 22 Christian Benedict B. ARGA 11027614 AE-FIN Fos sil fuel consumption and net income has been proven to have a positive relationship.This is because whenever the net income of a plate increases, they can afford more goods such as food and electric dependent devices which consumes more fossil fuel. If the net income on the other hand goes down, the consumption of fossil fuel also goes down. This is due to the fact that people tend to consume less when their income is lower. They buy less food and other goods which consume fossil fuel to be utilized. Energy use also has a positive relationship with the consumption of fossil fuel. Today, very some have switched to the use of renewable energy.There are very few houses that have solar panels to power up their place. Some industrial organizations have windmills and braggart(a) solar panels that power up their buildings and machineries. barely even though these alternative sources are more eco-friendly, it comes with a very ample price tag. It is very expensive to switch to renewab le energy sources than just obviously using fossil fuel for power. So this means that the more a household or organization use energy, more and more fossil fuel is burned and consumed. Fossil fuel is the most reliable source of energy today.If for example, a certain country would want to reduce its fossil fuel consumption, they can implement laws like to increase the taxes on fossil fuel so that people would be labored to switch to other energy resources. The use of fossil 23 Christian Benedict B. ARGA 11027614 AE-FIN fuel hasnt really been a win for our planet. Burning fossil fuels ignition greenhouse gases which lead to the depletion of the ozone layer. Aside from this, fossil fuel may someday be burnt out completely. Embracing other sources of energy which may be safe for the environment may be a good thing because fossil fuel will not last for a very, very long time. 4 Christian Benedict B. ARGA 11027614 AE-FIN Bibliography Gujarati, D. , &038Porter, D. (2009). Basic economet rics. Singapore McGrawHill/Irwin. Damassa, T. (n. d. ). Fossil Fuel Consumption and its Implications land Resources Institute. World Resources Institute Global Warming, Climate Change, Ecosystems, sustainable Markets, Good 2, Governance 2012, &038 the from Environment. Retrieved declination http//www. wri. org/stories/2006/11/fossil-fuel-consumption-and-itsimplications Data The World Bank. (n. d. ). Data The World Bank. Retrieved November 30, 2012, from http//data. worldbank. rg/ Fossil Fuels and Energy Use. (n. d. ). B. C. Air calibre Home. Retrieved December 9, 2012, from http//www. bcairquality. ca/101/fossil-fuels. hypertext mark-up language Fossil Department of Energy. (n. d. ). Energy. gov Department of Energy. Retrieved December 5, 2012, from http//energy. gov/science- innovation/energy-sources/fossil 25 Christian Benedict B. ARGA 11027614 AE-FIN Data Presentation twelvemonth 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1 995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Fossil fuel energy consumption (% of total) 55. 31347732 54. 8931033 53. 78592188 49. 29623659 45. 48943701 43. 37568802 44. 38229089 35. 31123038 35. 76117547 36. 35431158 40. 26445038 41. 63311248 42. 63808088 43. 43920259 44. 68749999 48. 64714575 49. 75059198 52. 18039963 55. 84399353 56. 88793876 58. 26781808 56. 4225028 53. 69666356 53. 57196521 54. 87855853 56. 41898661 57. 72775356 56. 78790726 58. 16262043 56. 49811715 56. 71572428 57. 1050697 Inflation, GDP deflator (annual %) 8. 272875998 9. 331739787 14. 83954359 14. 24994909 11. 70313893 8. 701224356 14. 22188106 53. 3359576 17. 63285991 2. 952878059 7. 4981921 9. 647022877 9. 033063566 12. 97128127 16. 268799 7. 932658326 6. 832158129 9. 991314599 7. 550870238 7. 661037838 6. 224392022 22. 38172301 6. 585053049 5. 709799946 5. 54947782 4. 162229818 3. 201335984 5. 516871 5. 828020679 4. 949030524 3. 090323839 7. 549059634 Net income (BoP, current US$) -125000000 -118000000 -206000000 -420000000 -503000000 -1021000000 -836000000 -1449000000 -1300000000 -1301000000 -1190000000 -1185000000 -1349000000 -872000000 -500000000 445000000 924000000 1850000000 3662000000 3282000000 4681000000 3769000000 -1062000000 -30000000 -57000000 -430000000 -287000000 -74000000 -298000000 -1261000000 -899000000 105000000 26Energy use (kT) 20161. 985 20500. 008 21698. 546 22748. 27 22856. 792 23462. 731 25453. 089 22902. 456 24008. 288 24091. 214 25209. 039 26593. 306 27975. 579 28891. 831 28878. 767 30215. 561 30233. 992 32369. 158 33981. 925 35217. 379 37071. 776 38075. 904 39044. 627 40423. 602 38777. 981 39300. 931 39385. 191 39152. 811 39178. 35 38848. 861 38142. 364 39605. 368 Christian Benedict B. ARGA 2009 2010 2011 57. 04278229 57. 04278229 57. 04278229 2. 773246711 4. 222388865 4. 246089114 11027614 -193000000 505000000 1293000000 38842. 497 38842. 497 38842. 497 AE-FIN 27