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FIGURE 3.12 Sample regression line based on the data of Table 3.2.

90 PART ONE: SINGLE-EQUATION REGRESSION MODELS

line, indicates the average level of weekly consumption expenditure when weekly income is zero. However, this is a mechanical interpretation of the intercept term. In regression analysis such literal interpretation of the intercept term may not be always meaningful, although in the present example it can be argued that a family without any income (because of unemployment, layoff, etc.) might maintain some minimum level of consumption expenditure either by borrowing or dissaving. But in general one has to use common sense in interpreting the intercept term, for very often the sample range of X values may not include zero as one of the observed values.

Perhaps it is best to interpret the intercept term as the mean or average effect on Y of all the variables omitted from the regression model. The value of r2 of 0.9621 means that about 96 percent of the variation in the weekly consumption expenditure is explained by income. Since r2 can at most be 1, the observed r2 suggests that the sample regression line fits the data very well.26 The coefficient of correlation of 0.9809 shows that the two variables, consumption expenditure and income, are highly positively correlated. The estimated standard errors of the regression coefficients will be interpreted in Chapter 5.

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