Table 6.9 gives data on the GDP (gross domestic product) deflator for domestic goods and the GDP deflator for imports for Singapore for the period 1968-1982. The GDP deflator is often used as an indicator of in- flation in place of the CPI. Singapore is a small, open economy, heavily dependent on foreign trade for its survival.
|
TABLE 6.8
|
|
|
Industry
|
log(V/L)
|
log W
|
|
Wheat flour
|
3.6973
|
2.9617
|
|
Sugar
|
3.4795
|
2.8532
|
|
Paints and varnishes
|
4.0004
|
3.1158
|
|
Cement
|
3.6609
|
3.0371
|
|
Glass and glassware
|
3.2321
|
2.8727
|
|
Ceramics
|
3.3418
|
2.9745
|
|
Plywood
|
3.4308
|
2.8287
|
|
Cotton textiles
|
3.3158
|
3.0888
|
|
Woolen textiles
|
3.5062
|
3.0086
|
|
Jute textiles
|
3.2352
|
2.9680
|
|
Chemicals
|
3.8823
|
3.0909
|
|
Aluminum
|
3.7309
|
3.0881
|
|
Iron and steel
|
3.7716
|
3.2256
|
|
Bicycles
|
3.6601
|
3.1025
|
|
Sewing machines
|
3.7554
|
3.1354
|
|
TABLE 6.9
|
|
|
Year
|
GDP deflator
for domestic goods,
Y
|
GDP deflator for imports, X
|
|
1968
|
1000
|
1000
|
|
1969
|
1023
|
1042
|
|
1970
|
1040
|
1092
|
|
1971
|
1087
|
1105
|
|
1972
|
1146
|
1110
|
|
1973
|
1285
|
1257
|
|
1974
|
1485
|
1749
|
|
1975
|
1521
|
1770
|
|
1976
|
1543
|
1889
|
|
1977
|
1567
|
1974
|
|
1978
|
1592
|
2015
|
|
1979
|
1714
|
2260
|
|
1980
|
1841
|
2621
|
|
1981
|
1959
|
2777
|
|
1982
|
2033
|
2735
|
To study the relationship between domestic and world prices, you are given the following models:
1. Yt = α1 + α2 Xt + ut
2. Yt = β2 Xt + ut
where Y = GDP deflator for domestic goods and X = GDP deflator for imports.
a. How would you choose between the two models a priori?
b. Fit both models to the data and decide which gives a better fit.
c. What other model(s) might be appropriate for the data?