Heteroscedasticity

Heteroskedasticity (Value of Error Term Are Not Constant)

-Violates classical assumption 5, that errors have constant variance

(Var( i ) = σ2, ∀i )

-Not always realistic: if we put basketball players and mice into the

same dataset, most likely errors for basketball players would have

larger variance than errors for mice (if measured in the same units)

-Most likely to take place in cross-sectional models

-OLS estimates of ˆβ remain unbiased but have similar problems to
serial correlation









Example


A classic example of heteroscedasticity is that of income versus expenditure on meals. As one's income increases, the variability of food consumption will increase. A poorer person will spend a rather constant amount by always eating less expensive food; a wealthier person may occasionally buy inexpensive food and at other times eat expensive meals. Those with higher incomes display a greater variability of food consumption.




There are several methods to test for the presence of heteroscedasticity:


1) Park  test 
2) White test
3) Breusch-Pagan test


Remedies for heteroskedasticity



 1)  Weighted least squares
 2)  Heteroskedasticity-corrected standard errors
 3)  Redefining the variables




To Detect Heteroscedasticity:
     Plot  values of residual againts value of independent  variables..


Solution:
     Increase sample size data @ by  droping one of the highly correlated variables..

BNM maintains key rate, raises SRR to 2pc

As expected, Bank Negara Malaysia (BNM) left borrowing costs unchanged at 2.75 per cent yesterday but raised the amount of money banks must keep at the central bank.

Starting in April, the statutory reserve requirement (SRR) will be doubled to 2 per cent.

It said that the decision to raise the SRR was to manage the risk of excess liquidity from large shifts in capital flows into the Asian region which would result in financial and macroeconomic imbalances.

In the case of Malaysia, the assessment is that the rise in liquidity in the domestic financial system has thus far been well-managed.

BNM also said the SRR is an instrument to manage liquidity and not a signal on the stance of monetary policy like the Overnight Policy Rate (OPR).

The SRR ratio was cut to 1 per cent in March 2009 from as high as 4 per cent in October 2008.

In its analysis of the domestic economy, the Monetary Policy Committee said there is growth in private consumption as well as business spending activities despite modest growth in exports.

While growth is expected to be moderate in the earlier part of the year, it is likely to improve during the course of the year, driven by strong expansion in domestic demand, led by private consumption.

"Private investment is also projected to strengthen, underpinned by the improving outlook for the domestic economy and further expansion of new growth industries."

HSBC Bank said BNM appears to be upbeat on domestic growth prospects.

"Even if external demand may still be relatively lacklustre in its view, the domestic side of things appears to be giving the central bank much comfort," remarked economists Wellian Wiranto and Namrata Mittal.

"With today's statement, it is quite clear that some form of response is coming fairly soon in the form of rate hikes ... not because of oil in and of its own, but due to uptick in demand to show how comfortable it is with domestic demand growth."

Inflation is not as urgent an issue here as elsewhere, but BNM is already hinting at the possibility of re-hiking again soon, shifting focus towards demand-pull forces. 

Bank of America Merrill Lynch economist Dr Chua Hak Bin expects the central bank to begin tightening from the next monetary policy meeting in May, when inflation climbs above 3 per cent.

"Another round of fuel price hikes may occur sooner to contain escalating fuel subsidy costs."

Chua also expects BNM to continue normalising the SRR, bringing the rate to 4 per cent by the year-end.

Bank of America Merrill Lynch expects a 50 basis points rate rise for the OPR this year to 3.25 per cent.







  *

Makna Bacaan Tahiyat Akhir

- Segala penghormatan yang berkat solat yang baik adalah untuk Allah.
- Sejahtera atas engkau wahai Nabi dan rahmat Allah serta keberkatannya.
- Sejahtera ke atas kami dan atas hamba-hamba ('ibaadi) Allah yang soleh.
- Aku naik saksi (Asyhadu) bahawa (an) tiada (laa) Tuhan (ilaaha) melainkan (illa )Allah dan aku naik saksi bahawasanya Muhammad itu adalah pesuruh Allah.
- Ya Tuhan kami, selawatkanlah ke atas Nabi Muhammad dan ke atas keluarganya.
- Sebagaimana Engkau selawatkan ke atas Ibrahim dan atas keluarga Ibrahim.
- Berkatilah ke atas Muhammad dan atas keluarganya sebagaimana Engkau berkati ke atas Ibrahim dan atas keluarga Ibrahim di dalam alam ini.
- Sesungguhnya Engkau Maha Terpuji lagi Maha Agung.

Automatic Stabilizers

We have seen that changes in government purchases, taxes and transfer payments can have an impact on equilibrium aggregate demand. When a government deliberately changes its spending or taxation policies in order to influence aggregate demand, we call that "fiscal policy." But there is another, more automatic way that spending and taxation can influence the economy.

• Some kinds of taxes rise more than proportionately when income increases. A progressive income tax is an example of this. "progressive" means that the tax rate is higher on higher incomes. Thus, when income in general increases, more people are in the higher tax brackets, and so the average tax rate is higher.
• Some kinds of transfer payments and government purchases rise when income drops. Unemployment compensation and income supplements for poor people are examples, as are purchases of services for the poor. When income in general drops, there are more poor people eligible for these transfers and services, so spending on them increases.

These taxes, transfers, and purchases are automatic stabilizers of the economy. To see why, think of what happens when the economy goes into a recession, perhaps because of a sudden drop in autonomous consumption. The progressive taxes drop even faster than income, and this decrease in taxes has a multiplier effect, partly offsetting the drop in autonomous consumption, so that equilibrium income doesn't drop as far or as fast as it could. Similarly, the transfers to and services for the poor increase, and these too have multiplier effects and tend to offset the drop in autonomous consumption. Thus, equilibrium aggregate demand drops less than it would have dropped simply because of the decrease in autonomous consumption alone. The economy is more stable.

This works the other way in a boom. An example is the year 1997 in the U. S. A. At the beginning of the year, our government was divided over plans to gradually reduce the government deficit to zero by sometime in the next century. By the end of the year, the deficit was much lower than anyone had anticipated. This happened because, over the year, steady growth of production reduced unemployment to its lowest rate in twenty-five years. This increased growth raised tax revenues and cut transfers, reducing the government deficit. Incidentally, the multiplier theory tells us that the dropping deficit will also have slowed the growth of production, partly offsetting the rise in aggregate demand that would otherwise have occurred.

On the whole, these automatic stabilizers are probably a good thing. If the government has to pass a law to cut taxes in a recession, for example, that can be a time-consuming process. First, the government has to be made aware that there is a recession, and then it makes a law, and then the law takes some time to go into effect. By the time it has an effect, the recession may very well be over and a boom going on -- so that instead of stabilizing the economy, the tax cut makes it less stable. Automatic stabilizers can act in a much quicker and more timely fashion.

We may also hope that the government deficits in recession periods will be offset by government surpluses in boom periods. This is called a "cyclically balanced budget," and probably is the only realistic kind of balanced budget. Unfortunately, it is a potentiality -- a hope -- not a fact.

*Transfer Payment = Payment of money by government to individual for which the payer receive no good @ service directly in return..

The Simple Keynesian Model

The Simple Keynesian Model, which is also known as the Keynesian Cross, emphasizes one basic point. That point is that a decrease in aggregate demand can lead to a stable equilibrium with substantial unemployment.

The Simple Keynesian Model application first explains the roles of consumption and investment and then explains the accounting identity Y = C + I + G. Together, these elements determine the equilibrium level of output.

The policy analysis experiments study the effects of animal spirits and fiscal policy. The numerical results illustrate the calculation of a fiscal policy multiplier.

A concluding experiment extends the model to make investment a function of the interest rate. Graphing the shifts in investment caused by changes in interest rates then reveals a simple version of the IS curve found in an IS/LM analysis.

Classical economics

Widely regarded as the first modern school of economic thought. Its major developers include Adam Smith, Jean-Baptiste Say, David Ricardo, Thomas Malthus and John Stuart Mill.

Adam Smith's The Wealth of Nations in 1776 is usually considered to mark the beginning of classical economics. The school was active into the mid 19th century and was followed byneoclassical economics in Britain beginning around 1870, or, in Marx's definition by "vulgar political economy" from the 1830s. The definition of classical economics is debated, particularly the period 1830–70 and the connection to neoclassical economics. The term "classical economics" was coined by Karl Marx to refer to Ricardian economics – the economics of David Ricardo and James Mill and their predecessors – but usage was subsequently extended to include the followers of Ricardo.

There are three basic assumptions of Classical Economics theories. They are:

• Flexible Prices: The prices of everything, the commodities, labor (wages), land (rent), etc. must be both upwardly and downwardly mobile. Unfortunately, in reality, it has been observed that these prices are not as readily flexible downwards as they are upwards, due a variety of market imperfections, like laws, unions, etc.
• Say's Law: 'Supply creates its own demand'. The Say's law suggests that the aggregate production in an economy must generate an income enough to purchase all of the economy's output. In other words, if a good is produced, it has to be bought. Unfortunately, this assumption also does not hold good today, as most economies today are demand driven (production is based on demand. Demand is not based on production or supply).
• Savings - Investment Equality: This assumption requires the household savings to equal the capital investment expenditures. Now it takes no genius to know, that this is rarely the case. Yet, should the savings not equal the investment, the 'flexible' interest rates should be able to restore the equilibrium.

Malaysia should focus on new emerging markets

Malaysia, the world's second largest palm oil exporter, should focus on new emerging markets to offset declining sales in other countries like main buyers China and India.

TH Plantations Bhd chief executive officer Datuk Zainal Azwar Zainal Aminuddin said this would include markets such as Eastern Europe and Pakistan.

"We used to be number one but now overtaken by Indonesia. We have to be more aggressive in cushioning this.

"This effort should be spearheaded by the Malaysian Palm Oil Council," Zainal told Business Times at the sidelines of the Bursa Malaysia Palm and Lauric Oils Conference and Exhibition Price Outlook 2011.

Indonesia overtook Malaysia in 2007 to become the world's number one palm oil producer but traders said the republic continues to grab Malaysia's market share by selling cheaper palm oil to China and India.

As a result, Malaysia's exports to China and India have been declining over the past few years partly due to the undercutting.

India and China also protect their own vegetable oil farmers by increasing import tariffs.

IJM Plantations Bhd chief executive officer and managing director Joseph Tek Choon Yee however said the decline is more of a technical correction rather than Indonesia's move.

"The supply demand situation right now is simply too tight. Although Indonesia and Malaysia account for 85 per cent of the world's palm oil market share, there is still not enough palm oil for the world.

"I believe this is more of a technical correction, China and India demand will come back again in the future," said Tek.

Malaysia GDP Growth Rate

The Gross Domestic Product (GDP) in Malaysia expanded 1.5 percent in the fourth quarter of 2010 over the previous quarter. From 2000 until 2010, Malaysia's average quarterly GDP Growth was 1.20 percent reaching an historical high of 5.70 percent in September of 2009 and a record low of -7.80 percent in March of 2009. Malaysia is a rapidly developing economy in Asia. Malaysia, a middle-income country, has transformed itself since the 1970s from a producer of raw materials into an emerging multi-sector economy. The Government of Malaysia is continuing efforts to boost domestic demand to wean the economy off of its dependence on exports. Nevertheless, exports - particularly of electronics - remain a significant driver of the economy.

Finie Don & Fimie Don

Izinkan akak copy gambo ni ya fimie:) TQ

Dr kiri : Fizie Don, Fimie Don & Finie Don

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Rozita Che Wan Berudung

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