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FIGURE I.3 Personal consumption expenditure (Y) in relation to GDP (X), 1982-1996, both in billions of 1992 dollars.

the U.S. economy for the period 1981-1996. The Y variable in this table is the aggregate (for the economy as a whole) personal consumption expenditure (PCE) and the X variable is gross domestic product (GDP), a measure of aggregate income, both measured in billions of 1992 dollars. Therefore, the data are in "real" terms; that is, they are measured in constant (1992) prices. The data are plotted in Figure I.3 (cf. Figure I.2). For the time being neglect the line drawn in the figure.

5. Estimation of the Econometric Model

Now that we have the data, our next task is to estimate the parameters of the consumption function. The numerical estimates of the parameters give empirical content to the consumption function. The actual mechanics of estimating the parameters will be discussed in Chapter 3. For now, note that the statistical technique of regression analysis is the main tool used to obtain the estimates. Using this technique and the data given in Table I.1, we obtain the following estimates of j and j2, namely, -184.08 and 0.7064. Thus, the estimated consumption function is:

The hat on the Y indicates that it is an estimate.11 The estimated consumption function (i.e., regression line) is shown in Figure I.3.

11As a matter of convention, a hat over a variable or parameter indicates that it is an estimated value.

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