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A Sample Econometric Model

The document describes an econometric model of housing prices that uses floor area, age, and condition as independent variables to predict housing price (dependent variable). The model finds that floor area positively impacts price while age negatively impacts price. It also finds that excellent and mint condition homes have significantly higher prices than good condition homes. The model has high explanatory power (R^2 = 0.8534) and all coefficients are statistically significant based on the 5% level of significance, indicating the model effectively captures how the independent variables impact housing prices.

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Harvey Malmis Niere
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58 views

A Sample Econometric Model

The document describes an econometric model of housing prices that uses floor area, age, and condition as independent variables to predict housing price (dependent variable). The model finds that floor area positively impacts price while age negatively impacts price. It also finds that excellent and mint condition homes have significantly higher prices than good condition homes. The model has high explanatory power (R^2 = 0.8534) and all coefficients are statistically significant based on the 5% level of significance, indicating the model effectively captures how the independent variables impact housing prices.

Uploaded by

Harvey Malmis Niere
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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A SAMPLE ECONOMETRIC MODEL

Title:

An Econometric Model of Housing Prices

The Model:

𝑌̂ = 𝑏𝑜 + 𝑏1 𝑋1 + 𝑏2 𝑋2 + 𝑏3 𝑋3 + 𝑏4 𝑋4
where,

𝑌̂ = the predicted value of house price

𝑋1 = floor area (square foot)

𝑋2 = age (year)

𝑋3 = dummy variable for excellent condition (1 for excellent, 0 otherwise)

𝑋4 = dummy variable for mint condition (1 for mint, 0 otherwise)

Theoretical Framework:

Cite the relevant economic theory or theories here. A one paragraph discussion per theory is enough.

Conceptual Framework:

Explain here the relationship(s) between your independent variable(s) and your dependent variable.
This serves as an explanation to your schematic diagram. One sentence per relationship is enough. In
this example, you might say that, “Floor area, age of the house and house condition affect the price of
the house. Houses with larger floor area tend to command a higher price. Older houses tend to be
cheaper than newer houses. The better the condition of the houses, the higher the price of the house.”
Schematic Diagram:

Floor Area

Age of the Price of the


House House

House Condition

 Excellent
 Mint
 Good
Data:

Floor Area Age of the House


House Price ($) House Condition
(square foot) (years)
95,000 1,926 30 Good
119,000 2,069 40 Excellent
124,800 1,720 30 Excellent
135,000 1,396 15 Good
142,000 1,706 32 Mint
145,000 1,847 38 Mint
159,000 1,950 27 Mint
165,000 2,323 30 Excellent
182,000 2,285 26 Mint
183,000 3,752 35 Good
200,000 2,300 18 Good
211,000 2,525 17 Good
215,000 3,800 40 Excellent
219,000 1,740 12 Mint
Cite the source

Note: You may fold the computer print-out if it exceeds the page of your test booklet. For simple
regression, attach also a scatterplot.

Result:
𝑌̂ = 121,674.14 + 56.49𝑋1 − 3,970.46𝑋2 + 33,247.74𝑋3 + 47, 271.71𝑋4
p-value: (0.0000) (0.0000) (0.0000) (0.0231) (0.0016)

Note: It is customary to report the p-value below the coefficients. The p-value of intercept, 6.37221E-05,
means moving the decimal point 5 places to the left, 0.0000637221, a value very close to zero. Rounding
this value to 4 decimal places will make it 0.0000

Interpretation:

Declare your level of significance, 𝛼, beforehand.

You may say, “I choose the level of significance, 𝛼 = 5%”

“For every one square foot increase in the floor area of the house, the price of the house will increase by
$56.49. For every one year increase in the age of the house, the price of the house will decrease (careful
with the sign of the coefficients) by $3,970.46. Price of houses that are in excellent condition are on the
average higher by $33,247.74 compared to houses that are in good condition. Price of houses that are in
mint condition are on the average higher by $47,271.71 compared to houses that are in good
condition.”

(Note that good condition is our base category, the category in which all value of the dummy variables
are zero.)

“The price of the house is $121,674.14 when its floor area and age are all zero and the house is in good
condition. Since its impossible to have a house that has zero floor area and zero age, the intercept has
no economic meaning”

“Since the p-value of all the coefficients are lower than my 𝛼 of 5%, all the coefficients are statistically
significant.”

“The model has an adjusted 𝑅 2 of 0.8534. This means that 85.34% of the variation of housing prices is
captured by the model.”

“Since the p-value of the F-test is lower than my than my 𝛼 of 5%, the model as a whole is statistically
significant.”

Note: Ideal Topic

1. Interesting and imaginative model


2. Good theory
3. Plenty of observations (large n)
4. Low p-value
5. High 𝑅 2

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