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Jul 30, 2008

When you have different series with different measurements


One of the common mistakes a new comer in econometrics doe's is using different series (variable series) having different measurements for analysis like regression etc.

This is wrong approach, since you cannot compare for instance, GDP as function of CPI, interest rates, etc. If one observe GDP will available at current and constant price in billion/million dollars where as CPI is index and interest rate is in below two digits one.

Some people say there is no wrong in estimation GDP as function of CPI and interest rates, yes, but how do you calculate you elasticities, don't you think comparing milions with index is cumbersome.

Hence, convert everthing into log terms, then you can interpret your elasticity directly.

See next post for more how to convert into log terms and advantage and disadvantages.


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