CHAPTER 3

THE RESEARCH METHODS

This chapter presents and explains the methodology used in order to answer the
research questions. It illustrates the research design, research models and tests,
including the variables and sources of data to be used for the interpretation of data.

3.1 Research Design
The research uses a Quantitative Parametric Research Design, applying
Regression Analysis on the predictor model after using parametric tests on the data for
Autocorrelation, Normality and Cointegration. The model is based from a Panel Data of
selected European countries that shows marginal Economic Growth based on their
output indicated by their Gross Domestic Product resultant to their Inflation Rates and
Exchange Rates.

3.2 Sample Selection
The aim of the paper is to estimate the output generated of the European Union
through its Gross Domestic Product based on Inflation Rates and Exchange Rates from
the year 2004 to 2010. To quantify the relationship between the identified factors, a
statistical model was used. Other parametric tests were also used to ensure the validity
of the model.



3.3 Data Sources
The data that will be used in this study will be taken from the Government
Finance Statistics (GFS) of the International Monetary Fund (IMF) from 2004 to 2010.
Other secondary sources will be taken from the European Union website, International
New York Times and The Economist. The proponent will use the libraries of the Bangko
Sentral ng Pilipinas and University of Santo Tomas for books, documents, magazines,
newspapers, journals and other articles from different online sources. (See appendix X)

3.4 Statistical Treatment of the Data
The data includes the 18 European Union member countries within 2004 to 2010.
The figures indicate each respective countries Inflation Rate, Exchange Rates to Dollar
and their Gross Domestic Product. From the figures, a Panel Time Series Data was
tabulated. Prevailing factors were also converted to its Natural Logarithm to indicate
measurement of growth overtime and to use coefficients on the natural-log scale
making it directly interpretable as approximate to the differences between each sample
variable. Each observation was graphed and analyzed with the use of parametric tests
for significance.






3.5 Data Analysis
To estimate the relationship of each prevailing factors that affect the GDP of EU,
a statistical model was used and will be calculated with the use of Multiple Linear
Regression:

Where:











3.5.1 R-Squared Goodness-of-Fit

Also known as the coefficient of multiple determinations, it explains the variations
of the model. Since Linear regression estimates an equation to minimize the distance
between the fitted line and all of the data points the R-Squared tells whether the
differences between the observed values and the models predicted values are small
and unbiased. The equation below shows how R-squared is calculated:

Where:

is the squared difference of actual Y and Y estimate.

is the squared difference between Y and Y estimate.

is Gross Domestic Product in Natural Logarithm

is Inflation Rate in Natural Logarithm

is Exchange Rate in Natural Logarithm

C is th cross-sectional unit, (I = 1, , N)

I is th time period (I = 1, , N)

is the error term

3.5.2 Durbin-Watson Test for Autocorrelation
The need to apply the Durbin-Watson test for Autocorrelation is to determine the
likelihood that the error terms are correlated. Since the regression model used assumes
a normal distribution of error terms, it is important for the reliability of the model that the
error terms are not correlated. Small values from this test indicate presence of
autocorrelation. As a rule-of-thumb, a value lesser than 0.80 usually indicates a
likelihood of autocorrelation. An RPLOT is used to depict the results from this test.

3.5.3 Test for Normality of the Residuals
The Jarque-Bera test was applied to make an analysis on the skewness and the
kurtosis of the sample data. Since the variables is a series of observation for a nations
growth the normality of the distribution is compared instead of its cumulative distribution.

( )

)

Where: S is the sample skewness

K is the sample kurtosis

N is the sample size

3.5.3 Unit Root Test
An Autoregressive model requires a unit root test to verify that the variables are
non-stationary and that there are no common trends among variables. The Augmented-
Dickey Fuller was used for parametric testing, that is to identify the movement of
variables over time and the Philips-Peron for non-parametric, to identify trends for each
EU sample country.

3.5.4 Test for Cointegration of Variables
To test whether the model contains stationary linear combination of non-
stationary random variables, the Pedroni-Residual Cointegration which was based on
the Engle-Granger two-step method Test was used.

Where:

is stationary

3.5.5 Initial Results of the Regression Analysis
Using the model, initial regression results from Eviews 8 are shown below.


Dependent Variable: LNGDP
Method: Panel Least Squares
Date: 09/15/14 Time: 16:16
Sample: 2004 2010
Periods included: 7
Cross-sections included: 18
Total panel (balanced) observations: 126
Variable Coefficient Std. Error t-Statistic Prob.
C 10.45768 0.146834 71.22087 0.0000
LNINFLNT -0.267659 0.140541 -1.904497 0.0592
LNEXRATE 0.854943 0.082118 10.41120 0.0000
R-squared 0.468811 Mean dependent var 10.89965
Adjusted R-squared 0.460173 S.D. dependent var 1.566971
S.E. of regression 1.151299 Akaike info criterion 3.143181
Sum squared resid 163.0353 Schwarz criterion 3.210711
Log likelihood -195.0204 Hannan-Quinn criter. 3.170616
F-statistic 54.27790 Durbin-Watson stat 0.393342
Prob(F-statistic) 0.000000