Academy of Economic Studies

Faculty of Business Administration

Estimating the aggregate production function in

UK

Prof: Adriana Agapie

Bucharest
2015

Contents
Pros and cons for the estimation of an aggregated production function.....................................3
Testing the stationarity of the variables concerned................................................................3
Regression using differences of logarithms........................................................................17
We see now if the production function has constant increasing or decreasing returns to scale......17

Pros and cons for the estimation of an aggregated production

function
Cautam pe net motive pro si contra

Testing the stationarity of the variables concerned

In order to verify the stationarity of the series, we must compute the unit root test and see if the
Augmented Dickey-Fuller test value is lower than the critical 1% level, for labour, capital and rgnp.
Null Hypothesis: RGNP has a unit root
Exogenous: Constant, Linear Trend
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.*

0.599777
-4.148465
-3.500495
-3.179617

0.9993

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

Augmented Dickey-Fuller Test Equation

Dependent Variable: D(RGNP)
Method: Least Squares
Date: 05/24/15 Time: 12:53
Sample (adjusted): 2 52
Included observations: 51 after adjustments
Variable

Coefficien
t

Std. Error

t-Statistic

Prob.

RGNP(-1)
C
@TREND(1)

0.018035
37.19860
2.293369

0.030069
50.21181
6.102186

0.599777
0.740834
0.375827

0.5515
0.4624
0.7087

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

0.355224
0.328358
121.1752
704804.8
-315.4791
1.544039

Mean dependent var

S.D. dependent var
Akaike info criterion
Schwarz criterion
F-statistic
Prob(F-statistic)

212.1864
147.8580
12.48937
12.60301
13.22221
0.000027

T-Statistic Dickey-Fuller value 0.59 is higher than the 1% level therefore this series is not stationary.
1st difference is stationary t Stat is indeed lower than 1% level therefore RGNP is stationary.
Null Hypothesis: D(RGNP) has a unit root

Exogenous: Constant, Linear Trend

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.*

-5.406271
-4.152511
-3.502373
-3.180699

0.0003

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

Augmented Dickey-Fuller Test Equation

Dependent Variable: D(RGNP,2)
Method: Least Squares
Date: 05/24/15 Time: 12:58
Sample (adjusted): 3 52
Included observations: 50 after adjustments
Variable

Coefficien
t

Std. Error

t-Statistic

Prob.

D(RGNP(-1))
C
@TREND(1)

-0.761732
36.86864
4.778447

0.140898
35.87833
1.412884

-5.406271
1.027602
3.382053

0.0000
0.3094
0.0015

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

0.384464
0.358271
118.3429
658237.4
-308.0794
1.874641

Mean dependent var

S.D. dependent var
Akaike info criterion
Schwarz criterion
F-statistic
Prob(F-statistic)

5.106063
147.7293
12.44317
12.55790
14.67812
0.000011

As for capital upon performing the 1st difference unit root test t-Stat is still higher than 1% is not
stationary.
Null Hypothesis: D(CAPITAL) has a unit root
Exogenous: Constant, Linear Trend

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.*

-4.068445
-4.156734
-3.504330
-3.181826

0.0126

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

Augmented Dickey-Fuller Test Equation

Dependent Variable: D(CAPITAL,2)
Method: Least Squares
Date: 05/24/15 Time: 13:07
Sample (adjusted): 4 52
Included observations: 49 after adjustments
Variable

Coefficien
t

Std. Error

t-Statistic

Prob.

D(CAPITAL(-1))
D(CAPITAL(-1),2)
C
@TREND(1)

-0.352474
0.535092
93.02340
4.470783

0.086636
0.127157
28.96660
1.225176

-4.068445
4.208137
3.211403
3.649095

0.0002
0.0001
0.0024
0.0007

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

0.363456
0.321019
61.90488
172449.7
-269.5960
1.760140

Mean dependent var

S.D. dependent var
Akaike info criterion
Schwarz criterion
F-statistic
Prob(F-statistic)

13.80499
75.12702
11.16718
11.32162
8.564734
0.000131

Upon performing the 2nd difference we can see that the series is stationary. T-Stat is lower than 1%.

Null Hypothesis: D(CAPITAL) has a unit root

Exogenous: Constant, Linear Trend
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.*

-4.068445
-4.156734
-3.504330
-3.181826

0.0126

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

Augmented Dickey-Fuller Test Equation

Dependent Variable: D(CAPITAL,2)
Method: Least Squares
Date: 05/24/15 Time: 13:07
Sample (adjusted): 4 52
Included observations: 49 after adjustments
Variable

Coefficien
t

Std. Error

t-Statistic

Prob.

D(CAPITAL(-1))
D(CAPITAL(-1),2)
C
@TREND(1)

-0.352474
0.535092
93.02340
4.470783

0.086636
0.127157
28.96660
1.225176

-4.068445
4.208137
3.211403
3.649095

0.0002
0.0001
0.0024
0.0007

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

0.363456
0.321019
61.90488
172449.7
-269.5960
1.760140

Mean dependent var

S.D. dependent var
Akaike info criterion
Schwarz criterion
F-statistic
Prob(F-statistic)

13.80499
75.12702
11.16718
11.32162
8.564734
0.000131

Labour After computing the first unit root test we can see that the series is not stationary as t-Stat is
higher than 1% level.
Null Hypothesis: LABOR has a unit root

Exogenous: Constant, Linear Trend

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.*

-3.817639
-4.152511
-3.502373
-3.180699

0.0237

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

Augmented Dickey-Fuller Test Equation

Dependent Variable: D(LABOR)
Method: Least Squares
Date: 05/24/15 Time: 13:08
Sample (adjusted): 3 52
Included observations: 50 after adjustments
Variable

Coefficien
t

Std. Error

t-Statistic

Prob.

LABOR(-1)
D(LABOR(-1))
C
@TREND(1)

-0.249191
0.413125
14.95700
0.424917

0.065274
0.122500
3.736474
0.109178

-3.817639
3.372445
4.002973
3.891978

0.0004
0.0015
0.0002
0.0003

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

0.344121
0.301346
1.064630
52.13805
-71.99373
1.948348

Mean dependent var

S.D. dependent var
Akaike info criterion
Schwarz criterion
F-statistic
Prob(F-statistic)

1.537123
1.273701
3.039749
3.192711
8.044958
0.000205

Upon performing the second unit root test, we can see that t-Stat is lower than 1% therefore is stationary.

Null Hypothesis: D(LABOUR) has a unit root

Exogenous: Constant, Linear Trend
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.*

-5.082033
-4.156734
-3.504330
-3.181826

0.0007

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

Augmented Dickey-Fuller Test Equation

Dependent Variable: D(LABOUR,2)
Method: Least Squares
Date: 05/24/15 Time: 13:10
Sample (adjusted): 4 52
Included observations: 49 after adjustments
Variable

Coefficien
t

Std. Error

t-Statistic

Prob.

D(LABOUR(-1))
D(LABOUR(-1),2)
C
@TREND(1)

-0.839604
0.269304
0.963392
0.012310

0.165210
0.143826
0.416652
0.012175

-5.082033
1.872423
2.312225
1.011117

0.0000
0.0677
0.0254
0.3174

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

0.379038
0.337641
1.189596
63.68126
-75.94870
2.028437

Mean dependent var

S.D. dependent var
Akaike info criterion
Schwarz criterion
F-statistic
Prob(F-statistic)

At log_rgnp we can see that is not stationary.

0.019436
1.461682
3.263212
3.417647
9.156077
0.000076

Null Hypothesis: LOG_RGNP has a unit root

Exogenous: Constant, Linear Trend
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.*

-2.327151
-4.152511
-3.502373
-3.180699

0.4121

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

Augmented Dickey-Fuller Test Equation

Dependent Variable: D(LOG_RGNP)
Method: Least Squares
Date: 05/24/15 Time: 13:12
Sample (adjusted): 3 52
Included observations: 50 after adjustments
Variable

Coefficien
t

Std. Error

t-Statistic

Prob.

LOG_RGNP(-1)
D(LOG_RGNP(-1))
C
@TREND(1)

-0.187035
0.200301
1.485080
0.006115

0.080371
0.139797
0.624874
0.002667

-2.327151
1.432802
2.376608
2.292939

0.0244
0.1587
0.0217
0.0265

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

0.122164
0.064913
0.019802
0.018037
127.2363
1.873090

Mean dependent var

S.D. dependent var
Akaike info criterion
Schwarz criterion
F-statistic
Prob(F-statistic)

The next test shows that the series is stationary.

0.032969
0.020478
-4.929452
-4.776490
2.133853
0.108850

Null Hypothesis: D(LOG_RGNP) has a unit root

Exogenous: Constant, Linear Trend
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.*

-6.253466
-4.152511
-3.502373
-3.180699

0.0000

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

Augmented Dickey-Fuller Test Equation

Dependent Variable: D(LOG_RGNP,2)
Method: Least Squares
Date: 05/24/15 Time: 13:13
Sample (adjusted): 3 52
Included observations: 50 after adjustments
Variable

Coefficien
t

Std. Error

t-Statistic

Prob.

D(LOG_RGNP(-1))
C
@TREND(1)

-0.883502
0.031018
-7.45E-05

0.141282
0.008188
0.000205

-6.253466
3.788298
-0.364325

0.0000
0.0004
0.7172

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

0.455256
0.432075
0.020711
0.020161
124.4538
1.884766

Mean dependent var

S.D. dependent var
Akaike info criterion
Schwarz criterion
F-statistic
Prob(F-statistic)

-0.000728
0.027483
-4.858151
-4.743429
19.63950
0.000001

Log_labours first unit root test shows that the series is not stationary as t-Stat is higher than 1% level as
shown in the table below

Null Hypothesis: LOG_LABOUR has a unit root

Exogenous: Constant, Linear Trend
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.*

-2.351205
-4.152511
-3.502373
-3.180699

0.3997

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

Augmented Dickey-Fuller Test Equation

Dependent Variable: D(LOG_LABOUR)
Method: Least Squares
Date: 05/24/15 Time: 13:14
Sample (adjusted): 3 52
Included observations: 50 after adjustments
Variable

Coefficien
t

Std. Error

t-Statistic

Prob.

LOG_LABOUR(-1)
D(LOG_LABOUR(-1))
C
@TREND(1)

-0.175616
0.403214
0.737934
0.002923

0.074692
0.142172
0.308771
0.001267

-2.351205
2.836099
2.389910
2.307635

0.0231
0.0068
0.0210
0.0256

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

0.185441
0.132317
0.012075
0.006707
151.9695
1.894808

Mean dependent var

S.D. dependent var
Akaike info criterion
Schwarz criterion
F-statistic
Prob(F-statistic)

But after the 1st difference we can see that it is stationary.

0.015320
0.012963
-5.918781
-5.765819
3.490748
0.022964

Null Hypothesis: D(LOG_LABOUR) has a unit root

Exogenous: Constant, Linear Trend
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.*

-5.338968
-4.156734
-3.504330
-3.181826

0.0003

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

Augmented Dickey-Fuller Test Equation

Dependent Variable: D(LOG_LABOUR,2)
Method: Least Squares
Date: 05/24/15 Time: 13:14
Sample (adjusted): 4 52
Included observations: 49 after adjustments
Variable

Coefficien
t

D(LOG_LABOUR(-1)) -0.912550
D(LOG_LABOUR(1),2)
0.271893
C
0.015468
@TREND(1)
-5.68E-05
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
Durbin-Watson stat

0.408022
0.368557
0.012424
0.006946
147.5781
1.998336

Std. Error

t-Statistic

Prob.

0.170922

-5.338968

0.0000

0.142706
0.004900
0.000126

1.905264
3.156787
-0.449136

0.0631
0.0028
0.6555

Mean dependent var

S.D. dependent var
Akaike info criterion
Schwarz criterion
F-statistic
Prob(F-statistic)

-0.000103
0.015634
-5.860332
-5.705897
10.33878
0.000027

Log_capital unit root test level shows that the series is not stationary.
Null Hypothesis: LOG_CAPITAL has a unit root
Exogenous: Constant, Linear Trend
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.*

-1.393600
-4.156734
-3.504330
-3.181826

0.8506

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

Augmented Dickey-Fuller Test Equation

Dependent Variable: D(LOG_CAPITAL)
Method: Least Squares
Date: 05/24/15 Time: 13:15
Sample (adjusted): 4 52
Included observations: 49 after adjustments
Variable
LOG_CAPITAL(-1)
D(LOG_CAPITAL(1))
D(LOG_CAPITAL(2))
C
@TREND(1)
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
Durbin-Watson stat

Coefficien
t

Std. Error

t-Statistic

Prob.

-0.017250

0.012378

-1.393600

0.1704

0.983780

0.135100

7.281849

0.0000

-0.395188
0.171097
0.000408

0.135135
0.111289
0.000384

-2.924396
1.537414
1.061537

0.0054
0.1314
0.2942

0.766794
0.745594
0.003402
0.000509
211.6012
1.874476

Mean dependent var

S.D. dependent var
Akaike info criterion
Schwarz criterion
F-statistic
Prob(F-statistic)

0.031118
0.006744
-8.432702
-8.239659
36.16863
0.000000

The 1st difference shown in the table below shows that the series is not stationary.
Null Hypothesis: D(LOG_CAPITAL) has a unit root
Exogenous: Constant, Linear Trend
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.*

-3.963298
-4.156734
-3.504330
-3.181826

0.0165

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

Augmented Dickey-Fuller Test Equation

Dependent Variable: D(LOG_CAPITAL,2)
Method: Least Squares
Date: 05/24/15 Time: 13:16
Sample (adjusted): 4 52
Included observations: 49 after adjustments
Variable

Coefficien
t

D(LOG_CAPITAL(-1)) -0.411039
D(LOG_CAPITAL(1),2)
0.416242
C
0.016116
@TREND(1)
-0.000124
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
Durbin-Watson stat

0.291777
0.244563
0.003437
0.000532
210.5430
1.863267

Std. Error

t-Statistic

Prob.

0.103711

-3.963298

0.0003

0.135686
0.004264
4.72E-05

3.067675
3.779808
-2.619319

0.0036
0.0005
0.0120

Mean dependent var

S.D. dependent var
Akaike info criterion
Schwarz criterion
F-statistic
Prob(F-statistic)

-0.000231
0.003954
-8.430325
-8.275891
6.179783
0.001312

Upon computing the 2nd difference we can see that the series is stationary.
Null Hypothesis: D(LOG_CAPITAL,2) has a unit root
Exogenous: Constant, Linear Trend
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.*

-6.268911
-4.161144
-3.506374
-3.183002

0.0000

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

Augmented Dickey-Fuller Test Equation

Dependent Variable: D(LOG_CAPITAL,3)
Method: Least Squares
Date: 05/24/15 Time: 13:17
Sample (adjusted): 5 52
Included observations: 48 after adjustments
Variable
D(LOG_CAPITAL(1),2)
D(LOG_CAPITAL(1),3)
C
@TREND(1)
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
Durbin-Watson stat

Coefficien
t

Std. Error

t-Statistic

Prob.

-1.097258

0.175032

-6.268911

0.0000

0.382424
-0.000183
-2.06E-06

0.139129
0.001195
3.88E-05

2.748694
-0.153546
-0.053089

0.0086
0.8787
0.9579

0.486542
0.451534
0.003720
0.000609
202.4977
2.104704

Mean dependent var

S.D. dependent var
Akaike info criterion
Schwarz criterion
F-statistic
Prob(F-statistic)

7.64E-05
0.005023
-8.270737
-8.114804
13.89784
0.000002

We have generated a regression with the logarithms and we can notice r-squared having almost a perfect
value (0.99 almost 1) and durbin Watson has a low value resulting in a spurious regression.

Dependent Variable: LOG_RGNP

Method: Least Squares
Date: 05/24/15 Time: 13:27
Sample: 1 52
Included observations: 52
LOG_RGNP=C(1)+C(2)*LOG_CAPITAL+C(3)*LOG_LABOUR

C(1)
C(2)
C(3)
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood

Coefficien
t

Std. Error

t-Statistic

Prob.

-1.506665
0.867848
0.363643

0.140143
0.090569
0.168440

-10.75088
9.582127
2.158891

0.0000
0.0000
0.0358

0.996586
0.996447
0.029967
0.044003
110.1587

Mean dependent var

S.D. dependent var
Akaike info criterion
Schwarz criterion
Durbin-Watson stat

8.664846
0.502731
-4.121487
-4.008915
0.285118

The spurious regression resulted because of the fact that log_rgnp and log_labour variables are stationary
in 1st difference, but log_capital is not stationary in 1st difference.

Regression using differences of logarithms

Upon performing the second regression we receive the following:

Dependent Variable: DIF_LOG_RGNP

Method: Least Squares
Date: 05/24/15 Time: 13:44
Sample (adjusted): 2 52
Included observations: 51 after adjustments
DIF_LOG_RGNP=C(1)+C(2)*DIF_LOG_LABOUR+C(3)
*DIF_LOG_CAPITAL

C(1)
C(2)
C(3)
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood

Coefficien
t

Std. Error

t-Statistic

Prob.

0.003213
1.144980
0.402547

0.009205
0.166767
0.318464

0.349031
6.865747
1.264027

0.7286
0.0000
0.2123

0.611766
0.595590
0.013287
0.008474
149.5484

Mean dependent var

S.D. dependent var
Akaike info criterion
Schwarz criterion
Durbin-Watson stat

0.033678
0.020894
-5.746996
-5.633360
1.856282

The regression is not spurious because R-squared is not perfect anymore and moreover Durbin Watson
has a decent value.

We see now if the production function has constant increasing or

decreasing returns to scale.
Wald Test:
Equation: REGRESSION_2
Test Statistic
F-statistic
Chi-square

Value
3.897829
3.897829

df

Probability

(1, 48)
1

0.0541
0.0483

Value

Std. Err.

0.547526

0.277328

Null Hypothesis Summary:

Normalized Restriction (= 0)
-1 + C(2) + C(3)
Restrictions are linear in coefficients.
Increasing returns to scale after performing the Wald test f statistic compared to 1:

>1 increasing
<1 decreasing
=1 constant returns to scale

Now we check if there is a co-integration relationship between rgnp, labour and capital. We cant check
given the fact that the variables are not stationary in the same order, we cannot do the error correction
model.
There is no long term relationship between the variables.