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Thread: Discussion on the functional form of dependent variable(Econometrics)

  1. #1
    Feb 2009

    Discussion on the functional form of dependent variable(Econometrics)

    I'm currently doing a little econometric analysis using Eviews. I'm using R&D spending (as a % of GDP) as the dependent variable, and basically just doing a cross country, 1 period regression with some other variables concerning institutions and such. I've seen the R&D variable used in a similar paper (with other explanatory variables), except the author used the (natural) logarithm. A teacher of mine advised me to just take the normal values if it was a percentage of income, but the author of the paper I mentioned didn't and I've been browsing around to see why he would do that, but unfortunately I've not been able to come with a satisfying answer. Taking the Ln or not does influence my results so I would like to hear some thoughts from all you fine lads here as to why one would take the logarithm of 'X as % of Y' in the first place. Some further info: Just doing a OLS, below are some descriptive statistics:

    R_D Log(R_D)
    Mean 1.131679 -0.295124
    Median 0.769882 -0.261518
    Maximum 3.708730 1.310689
    Minimum 0.025416 -3.672369
    Std. Dev. 0.939672 1.042697
    Skewness 0.999514 -0.754034
    Kurtosis 3.122134 3.570058

    Jarque-Bera 9.191939 5.956573
    Probability 0.010092 0.050880

    Sum 62.24235 -16.23181
    Sum Sq. Dev. 47.68106 58.70976

    Observations 55 55

    (Sorry, the above table doesn't come out well, first number belongs to normal value of R&D, second to the Log version)
    Last edited by Flyingdutchman; Aug 3rd 2009 at 08:22 AM. Reason: table isn't clear
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  2. #2
    Feb 2009
    Well on further inspection of scatter graphs with the relevant independent variable the other author had in common ln(R&D) behaved in a more linear way than R&D so I guess I have my answer
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