THE SUPERIOR UNIVERSITY, LAHORE

BASIC ECONOMETRICS

Mid Term Project:

Econometric Model, Correlation, Regression Analysis & Policies.

Submitted By:

Rao Sajid Ali Khan MBTW-F19-001

Bilal Aslam MBTW-F19-002

Submission Date:

28th Mar, 2021.

Submitted To:

Dr. Muhammad Saeed Aas Meo.

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Abstract:
Electricity consumption plays a significant role in increasing the share of total energy
consumption worldwide and has a close association with the economy. This research
analyzes the factors in two ways. First, this study estimates the electricity consumption in
United States of America during 1998 to 2018 using Index Decomposition Analysis between
share of Electricity Consumption, Economic Development (GDP), Unemployment Rate and
Population Growth. Second, an appropriate decoupling analysis method is taken to evaluate
the relationship between related variables and the process of sustainable growth. These
analyses are based on both sectorial and national levels. The outcomes show that the
economic structure sector effect was the major driving factor growing total electricity
consumption in USA, and energy intensity occurred with positive fluctuations during 1998
to 2018. The agriculture, industrial, and domestic sectors were the top three sectors that
increased electricity consumption. The effects of electricity variations caused by GDP growth
and showed seven decoupling states during the whole period. Finally, in recent years, the
agriculture sector has a weak decoupling, while energy-intensive sectors had an expensive
decoupling and transferred to a weak decoupling over the future period. Consequently,
electricity production, energy policies, and energy management need to be better integrated
with economic planning exercises.

Introduction:
The United States consumes a bit less than four trillion kilowatt-hours of electricity each
year, with the electric sector as a whole representing more than $350 billion in retail sales
(that's a few percentage points of total U.S. gross domestic product). The biggest drivers of
electricity demand are population, economic activity, the weather, and daily patterns of
human activity. The first two factors affect electricity demand over periods of years or longer
(figure below, which shows that electricity demand in the U.S. has basically grown each year
except during major recessions). The weather and human activity patterns (e.g., it is warmer
in the summer than in the winter, and people tend to move around during the day and sleep
at night) influences electricity demand from hour to hour and from day to day.

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Objective of the Study:
 To examine relationship between Gross Domestic Product and Electricity
Consumption.
 To examine relationship between Unemployment Rate and Electricity Consumption.
 To examine relationship between Population Growth and Electricity Consumption.

Research Questions of the Study:

 Does Gross Domestic Product significantly affect Electricity Consumption?
 Does Employment Rate significantly affect Electricity Consumption?
 Does Population Growth significantly affect Electricity Consumption?

Research Hypothesis:
H1; There is significant relationship between Gross Domestic Product (GDP) and Electricity
Consumption.
H0; There is no significant relationship between Gross Domestic Product (GDP) and
Electricity Consumption (EC).
H1; There is significant relationship between Unemployment Rate (UER) and Electricity
Consumption (EC).
H0; There is no significant relationship between Unemployment Rate (UER) and Electricity
Consumption (EC).
H1; There is significant relationship between Population Growth (PG) and Electricity
Consumption (EC).
H0; There is no significant relationship between Population Growth (PG) and Electricity
Consumption (EC).

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Econometrics Model:
𝑬𝑪𝒕 = 𝜷𝟎 + 𝜷𝟏 ( 𝑮𝑫𝑷𝒕 ) + 𝜷𝟐 ( 𝑼𝑬𝑹𝒕 ) + 𝜷𝟑 ( 𝑷𝑮𝒕 ) + 𝝁𝒕
EC = Electricity Consumption
GDP = Gross Domestic Product
UER = Unemployment Rate
PG = Population Growth

Data and Sources:

Variables & Data Source
Variables Data Source Explanation / Definition
Electric energy consumption is the form of
Electricity
World Development energy consumption that uses electric energy.
Consumption
Indicators 2021 Electric energy consumption is the actual energy
(EC)
demand made on existing electricity supply.
GDP is the final value of the goods and services
produced within the geographic boundaries of a
Gross Domestic World Development country during a specified period of time,
Product (GDP) Indicators 2021 normally a year. GDP growth rate is an
important indicator of the economic
performance of a country
The unemployment rate is defined as the
percentage of unemployed workers in the total
Unemployment World Development labor force. Workers are considered
Rate (UER) Indicators 2021 unemployed if they currently do not work,
despite the fact that they are able and willing to
do so.
Population World Development Population growth is the increase in the number of
Growth (PG) Indicators 2021 individuals in a population.

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 Trend Analysis of Electricity Consumption, Gross Domestic Product,
Unemployment Rate, Population Growth

Electricity Consumption GDP

13,800 6

13,600 4

13,400
2
13,200
0
13,000

-2
12,800

12,600 -4
98 00 02 04 06 08 10 12 14 16 18 98 00 02 04 06 08 10 12 14 16 18

Population UnEmploymeny Rate

330,000,000 10

320,000,000 9

8
310,000,000
7
300,000,000
6
290,000,000
5

280,000,000 4

270,000,000 3
98 00 02 04 06 08 10 12 14 16 18 98 00 02 04 06 08 10 12 14 16 18

The above data analysis is of USA for the period 1998-2018. It is quite evident from the graphs that
during 2008 financial slump, the Energy Consumption has gone down from 13,600 GW to near
12,800 GW, GDP has gone negative too, while Employment rate has increased which is quite obvious
in such scenarios. However, there isn’t any impact on Population growth as it remained linear and
increasing almost the same way. It means increase of decrease of population has no impact due to
economic crisis/slump.

Unemployment rate before 2008, it was hovering 4% that increased to 9.5% and lasted till 2012.
While with in span of 04 years, it has down to 3.8% due to recovery in USA economy. It is further
evident that the moment economy GDP starts moving in positive/upward direction, unemployment
rate starting to decrease.

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Correlation Analysis:

EC GDP UER PG

EC 1.000 0.221 -0.568 -0.121

GDP 0.221 1.000 -0.336 -0.518

UER -0.568 -0.336 1.000 0.272

PG -0.121 -0.518 0.272 1.000

The above table showing the following results of Correlation Analysis: -

1. The correlation coefficient of 0.221 indicates positive correlation between EC and GDP while
correlation coefficient of -0.568 and -0.121 indicates negative correlation between EC and
UER and PG respectively.

2. The correlation coefficient of 0.221 indicates positive correlation between GDP and EC while
correlation coefficient of -0.336 and -0.518 indicates negative correlation between GDP and
UER and PG respectively.

3. The correlation coefficient of 0.221 indicates positive correlation between GDP and EC while
correlation coefficient of -0.336 and -0.518 indicates negative correlation between GDP and
UER and PG respectively.

4. The correlation coefficient of 0.272 indicates positive correlation between UER and PG while
correlation coefficient of -0.568 and -0.336 indicates negative correlation between UER and
EC and GDP respectively.

5. The correlation coefficient of 0.272 indicates positive correlation between PG and UER while
correlation coefficient of -0.121 and -0.518 indicates negative correlation between PG and EC
and GDP respectively.

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Regression Analysis:

Variable Coefficient Std. Error t-Statistic Prob.

GDP 13.383 47.448 0.282 0.781

UNEMPLOYMENY_RATE 12.160 42.212 0.288 0.776

POPULATION -0.0000113 0.00000428 -2.647 0.016

C 16547.480 1331.394 12.428 0.000

R-squared 0.326 Mean dependent var 13216.690

Adjusted R-squared 0.208 S.D. dependent var 319.740

F-statistic 2.751 Durbin-Watson stat 1.310

Prob(F-statistic) 0.074

The above table showing the following results of Regression Analysis: -

1. There is +ve and significant relationship between GPD and Energy Consumption. It is means
1% increase in GPD, in this response there will be increase of 13.3% in Energy Consumption.

2. There is +ve and significant relationship between “Unemployment Rate” and Energy
Consumption. It is means 1% increase in “Unemployment Rate”, in this response there will
be increase of 12.160% in Energy Consumption.

3. There is -ve and significant relationship between “Population” and Energy Consumption. It is
means 1% increase in “Population”, in this response there will be decrease of 0.0000113% in
Energy Consumption.

4. Durbin-Watson stat value is less than 2 which means, Serial Correlation/Auto-Correlation

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 does exist. While if the value is 2 or more than 2, it means that there is No Serial Correlation.

5. The T-test values of all variable i.e. GDP, Unemployment Rate, Population is less than 1.9, it
means that all variables are insignificant. While if the values come out to be greater than 1.9,
it means that variables would be significant.

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