Solution 1.

First of all we take a log of the of the GDP and Year trend. These logarithms can
be generated by using the Generate Series by Equation option.
We run a Correlogram test on the Log(GDP) data, which gives the following
results:

From this result, we see that the AC starts from a very high value at lag 1 and
declines gradually.
Using the rule of thumb, the value upto lag 16 are statistically significant and the
ones beyond are insignificant.(Comparing with 1.96/sqrt(T) ).
This suggests that the Log(GDP) series is non-stationary.
For testing the Unit-Root of the same series, i.e. log(GDP), we run a Augmented
DF Test.
Following are the results of the ADF test:

From these results, we find that the T-Statistic value is to the right of Critical
values at 1%, 5% and 10% significant level. Hence, we accept the Null
Hypothesis and conclude that log(GDP) has a Unit-Root. So, we now run the ADF
test at 1st difference level of log(GDP). Following are the results:

We can see that the series is non-stationary since T-Stat value is greater than the
Critical Values at the 3 levels of significance. Hence, we accept the Null
Hypothesis and conclude that log(GDP) has a Unit-Root. Hence we proceed with
the 2nd difference ADF of Log(GDP). Following are the results:

We observe that the value of the computed T-statistic is less than the Critical
values. So, we can conclude that the data is stationary at 2 nd difference level.
The Null Hypothesis is thus rejected.
The results of Philips-Perron test also reinforce our previous conclusion and the
results are as shown:

Null Hypothesis: D(LNGDP,2) has a unit root

Exogenous: None
Bandwidth: 9 (Newey-West automatic) using Bartlett kernel

Phillips-Perron test statistic

Test critical values:
1% level
5% level
10% level

Adj. t-Stat

Prob.*

-28.88865
-2.603423
-1.946253
-1.613346

0.0000

*MacKinnon (1996) one-sided p-values.

Residual variance (no correction)

HAC corrected variance (Bartlett kernel)

0.001252
0.000216

Phillips-Perron Test Equation

Dependent Variable: D(LNGDP,3)
Method: Least Squares
Date: 07/23/16 Time: 00:55
Sample (adjusted): 4 64
Included observations: 61 after adjustments
Variable

Coefficient

Std. Error

t-Statistic

Prob.

D(LNGDP(-1),2)

-1.564273

0.106571

-14.67827

0.0000

R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
Durbin-Watson stat

0.782176
0.782176
0.035673
0.076354
117.2839
2.487466

Mean dependent var

S.D. dependent var
Akaike info criterion
Schwarz criterion
Hannan-Quinn criter.

-3.86E-05
0.076434
-3.812587
-3.777982
-3.799025

Estimation of Cointegrating Regression:

We here run a simple OLS regression of Log (GDP) on Log (Year). Following is the
result:

On the basis of these results, we get the following relationship:

LNGDP = 6.577 + 0.825 LNYEAR
This model is significant at 1% significant level.
In the above equation we have not considered any residual so now we will look
into it.
For finding the residual value we have to run ADF test again on the residual data
we get the below results:

Null Hypothesis: LNGDP has a unit root

Exogenous: None
Lag Length: 0 (Automatic - based on SIC, maxlag=10)

Augmented Dickey-Fuller test statistic

Test critical values:
1% level
5% level
10% level

t-Statistic

Prob.*

13.56202
-2.602185
-1.946072
-1.613448

1.0000

*MacKinnon (1996) one-sided p-values.

Augmented Dickey-Fuller Test Equation

Dependent Variable: D(LNGDP)
Method: Least Squares
Date: 07/23/16 Time: 03:30
Sample (adjusted): 2 64
Included observations: 63 after adjustments
Variable

Coefficient

Std. Error

t-Statistic

Prob.

LNGDP(-1)

0.005296

0.000391

13.56202

0.0000

R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
Durbin-Watson stat

0.100920
0.100920
0.028621
0.050789
134.9878
2.217889

Mean dependent var

S.D. dependent var
Akaike info criterion
Schwarz criterion
Hannan-Quinn criter.

0.047970
0.030185
-4.253582
-4.219564
-4.240202

So in this the t value is to the right of the critical t values and hence we have to
run the test again at first difference of the residual data.

Null Hypothesis: D(LNGDP) has a unit root

Exogenous: None
Lag Length: 2 (Automatic - based on SIC, maxlag=10)

Augmented Dickey-Fuller test statistic

Test critical values:
1% level
5% level
10% level

t-Statistic

Prob.*

-0.964960
-2.604073
-1.946348
-1.613293

0.2954

*MacKinnon (1996) one-sided p-values.

Augmented Dickey-Fuller Test Equation

Dependent Variable: D(LNGDP,2)
Method: Least Squares
Date: 07/23/16 Time: 03:32
Sample (adjusted): 5 64
Included observations: 60 after adjustments
Variable

Coefficient

Std. Error

t-Statistic

Prob.

D(LNGDP(-1))
D(LNGDP(-1),2)
D(LNGDP(-2),2)

-0.077638
-0.762746
-0.418859

0.080457
0.129548
0.120143

-0.964960
-5.887773
-3.486326

0.3386
0.0000
0.0009

R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
Durbin-Watson stat

0.467497
0.448812
0.032211
0.059140
122.5294
2.097333

Mean dependent var

S.D. dependent var
Akaike info criterion
Schwarz criterion
Hannan-Quinn criter.

-0.000213
0.043386
-3.984314
-3.879597
-3.943354

Again it is not significant so we go for a test at second difference level and the
results are below:
Null Hypothesis: D(LNGDP,2) has a unit root
Exogenous: None
Lag Length: 1 (Automatic - based on SIC, maxlag=10)

Augmented Dickey-Fuller test statistic

Test critical values:
1% level
5% level
10% level

t-Statistic

Prob.*

-10.96284
-2.604073
-1.946348
-1.613293

0.0000

*MacKinnon (1996) one-sided p-values.

Augmented Dickey-Fuller Test Equation

Dependent Variable: D(LNGDP,3)
Method: Least Squares
Date: 07/23/16 Time: 03:33
Sample (adjusted): 5 64
Included observations: 60 after adjustments
Variable

Coefficient

Std. Error

t-Statistic

Prob.

D(LNGDP(-1),2)
D(LNGDP(-1),3)

-2.262947
0.445799

0.206420
0.116785

-10.96284
3.817249

0.0000
0.0003

R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
Durbin-Watson stat

0.828185
0.825222
0.032192
0.060106
122.0433
2.115607

Mean dependent var

S.D. dependent var
Akaike info criterion
Schwarz criterion
Hannan-Quinn criter.

-0.000476
0.077002
-4.001444
-3.931632
-3.974137

At second difference level we find that the residual series is stationary and hence
we reject the null hypothesis
Now running a regression model for second difference level of gdp, year and
residual we get the following results:
Dependent Variable: D2LNGDP
Method: Least Squares
Date: 07/23/16 Time: 03:50
Sample (adjusted): 3 64
Included observations: 62 after adjustments
Variable

Coefficient

Std. Error

t-Statistic

Prob.

C
D2LNYEAR
D2RESID

-3.69E-18
0.825059
1.000000

4.10E-17
1.28E-15
9.30E-16

-0.090011
6.45E+14
1.08E+15

0.9286
0.0000
0.0000

R-squared
Adjusted R-squared
S.E. of regression
F-statistic
Prob(F-statistic)

1.000000
1.000000
3.11E-16
5.79E+29
0.000000

Mean dependent var

S.D. dependent var
Sum squared resid
Durbin-Watson stat

0.000374
0.042858
5.71E-30
3.437115

D2(LNGDP) = 0.825*D2( LNYEAR) +1.00*D2(RESID)

D2(LNYEAR)(2013-14) = -0.00024
D2(LNYEAR)(2014-15)= -0.00024
D2(Resid) (2013-14) = 0.02315
D2(Resid) (2014-15) = 0.023955
From these two we get the value of D2( LNGDP) (2013-14) =0.022949
D2(LNGDP) (2014-15) = 0.02376
Converting the double difference to GDP values we get a predicted value as
below
GDP for 2013-14 = 61533.7
GDP for 2014-15 = 67530.2
Now for obtaining the forecast we get the following results as below
.15
.10
.05
.00
-.05
-.10

D2LNGDPF

2012-13

2009-10

2006-07

2003-04

2000-01

1997-98

1994-95

1991-92

1988-89

1985-86

1982-83

1979-80

1976-77

1973-74

1970-71

1967-68

1964-65

1961-62

1958-59

1955-56

1952-53

-.15

Forecast: D2LNGDPF
Actual: D2LNGDP
Forecast sample: 1 64
Adjusted sample: 3 64
Included observations: 62
Root Mean Squared Error
Mean Absolute Error
Mean Abs. Percent Error
Theil Inequality Coefficient
Bias Proportion
Variance Proportion
Covariance Proportion
Theil U2 Coefficient
Symmetric MAPE

3.04E-16
2.47E-16
2.53E-12
3.57E-15
0.000013
0.008345
-14093531953766.538
1.42E-14
2.53E-12

2 S.E.

From the above results we see that the value of the bias proportion, Variance
proportion and covariance proportion are negligible. Since these values are low
we can predict that our estimate are satisfactory.