Question:
U.S. defense budget outlays, 1962€“1981. In order to explain the U.S. defense budget, you are asked to consider the following model:
Yt = β1 + β2X2t + β3X3t + β4X4t + β5X5t + ut
where
Yt = defense budget-outlay for year t, $ billions
X2t = GNP for year t, $ billions
X3t = U.S. military sales/assistance in year t, $ billions
X4t = aerospace industry sales, $ billions
X5t = military conflicts involving more than 100,000 troops. This variable takes a value of 1 when 100,000 or more troops are involved but is equal to zero when that number is under 100,000.
To test this model, you are given the data in the following table.
a. Estimate the parameters of this model and their standard errors and obtain R2, modified R2, and RÌ…2.
b. Comment on the results, taking into account any prior expectations you have about the relationship between Y and the various X variables.
c. What other variable(s) might you want to include in the model and why?
Transcribed Image Text:
Domestic Output (millions of barrels Per Barrel GNP, Thousands Price, Constant $ (X2) Constant $ Billions (X4) per day) (X3) of Wildcats, (Y) Time (Xs) 8.01 5.52 4.89 487.67 1948 = 1 4.83 5.05 1949 = 2 9.06 490.59 5.41 6.16 10.31 4.68 533.55 1950: 4.42 1951 = 4 11.76 576.57 4.36 4.55 4.66 1952 = 5 12.43 6.26 598.62 13.31 6.34 621.77 1953 = 6 6.81 13.10 613.67 1954 = 7 14.94 4.54 7.15 654.80 1955 = 8 7.17 16.17 4.44 668.84 1956 = 9 14.71 4.75 6.71 681.02 1957 = 10 13.20 4.56 7.05 679.53 1958 = 11 13.19 4.29 7.04 720.53 1959 = 12 11.70 4.19 7.18 736.86 1960 = 13 4.17 10.99 7.33 755.34 1961 = 14 10.80 4.11 7.54 799.15 1962 = 15 830.70 10.66 4.04 7.61 1963 = 16 10.75 3.96 7.80 874.29 1964 = 17 9.47 3.85 8.30 925.86 1965 = 18 3.75 10.31 8.81 980.98 1966 = 19 8.88 3.69 8.66 1,007.72 1,051.83 1,078.76 1,075.31 1,107.48 1,171.10 1,234.97 1,217.81 1,202.36 1,271.01 1,332.67 1,385.10 1967 = 20 8.88 3.56 8.78 1968 = 21 9.70 3.56 9.18 1969 = 22 %3D 7.69 3.48 9.03 1970 = 23 1971 = 24 1972 = 25 6.92 3.53 9.00 7.54 3.39 8.78 7.47 3.68 8.38 1973 = 26 8.63 5.92 8.01 1974 = 27 9.21 6.03 7.78 1975 = 28 6.12 9.23 7.88 1976 = 29 6.05 7.88 9.96 1977 = 30 %3D 10.78 5.89 8.67 1978 = 31
