A regression model should reflect reality. In economics, reality is explained by economic theory. Therefore, a regression model about economics should be based on economic theory, and the results must also be explained in terms of economics.

Coefficients of Simple Regression

Estimating a Consumption Function

The simplest form of consumption theory in economics states that “consumption is a function of income.” This macroeconomic relationship is written as

Consumption = f (income) |
(6.1) |

This equation is read as “consumption is a function of income.” The simplest functional form and the one most commonly used is the linear function.

Consumption = subsistence consumption + (marginal propensity to consume) ...

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