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Model Transformation

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What method has been used to transform Model 1 to Model 2? Equations for Model 1 and Model 2 are as follows:

Model 1

Ct = 26.19 + 0.6428GNPt - 0.4398Dt + et

Model 2

Ct /GNPt = 25.92(1/GNPt)- 0.4598(Dt/GNPt)+ et

C represents Consumption expenditures
GNP represents Gross National Product
D represents defense spending

Sample is quarterly from 1960 to 1969 (time series). Test for first order serial correlation.

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Solution Summary

The solution addresses what method has been used to transform Model 1 to Model 2? Equations for Model 1 and Model 2 are as follows:

Model 1

Ct = 26.19 + 0.6428GNPt - 0.4398Dt + et

Model 2

Ct /GNPt = 25.92(1/GNPt)- 0.4598(Dt/GNPt)+ et

C represents Consumption expenditures
GNP represents Gross National Product
D represents defense spending

Sample is quarterly from 1960 to 1969 (time series). Test for first order serial correlation.

Solution Preview

Model 2 is actually Model 1 divided by GNPt:
(1)Ct = 26.19 + 0.6428GNPt - 0.4398Dt + et
(2)(Ct/GNPt) = 25.92(1/GNPt)- 0.4598(Dt/GNPt)+ et ...

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