Real Consumer Expenditure and Real Disposable Personal Income - Research Paper Example

This is evidenced by the R2 value of 0.9968 for the exponential fit as compared to the R2 value of 0.943 for a linear fit (not shown here). From a span of only 60 years, consumption expenditure increased eightfold. The trend only serves as further evidence of the consumer characterization attributed to American society. To determine volatility we graph the rate of change of the data set. For a time-series data, the process would involve subtracting the value for the former year from the value of the current year then dividing by the value of the former year.

The resulting value is then multiplied by 100% to convert it into percentages. While the graph in Figure 1 shows that the values are essentially increasing, Figure 2 would indicate a very volatile set of values. The graph shows that the rate of change fluctuates almost in a sinusoidal manner yet it can be seen that the points are mostly placed higher than the x-axis indicating positive rate of change. What is observable is that the period seems to have a 10-year period which begins to rise at the base decade year, climbs up to maximum value in the middle period (5's) then decrease again.

The highest positive change was registered in the 3rd quarter of 1950 with a value of 5.146% and the highest negative change in the following quarter with -2.945%. Another time-series data which was acq. Another time-series data which was acquired from the same agency's website was the Personal Income and its Disposition also starting from the 1947 (1). Only the Total Disposable Personal Income found in Row 35 was. The same methodology was used for the analysis. From the graph of Figure 3, we can see that the data set is also increasing.

Employing the methods of best fit curve resulted to the exponential fitting as the choice because of the high R2 value. However, we can see that the recent values fall short of the expected behavior. Fig. 3: Graph of Real Disposable Personal Income (1947 - 2007 Quarterly) The rate of change, as can be seen from Figure 4, shows some semblance of sinusoidal behavior although the cycle can not be easily defined. This implies high volatility. As with the same method we used in the first data set, we see that there was generally positive rate of change with negative rates of change occurring in between decades.

The highest positive rate of change occurred in the First Quarter of 1950 corresponding to the highest rate of change in the first data while the highest negative rate of change occurred in the Second Quarter of 1947.Fig. 4: Percentage Change of the Total Disposable Personal Income (1947 - 2007)Consumption Models1. Model (1): Levels (long-run) with the equation:lnCt = a + blnYt which has the same form as y=mx+bWhere: Ct = is the Real Consumer Expenditure or yYt = is the Disposable Personal Income or x The basic question that this modeling exercise would like to answer is to determine whether there is a relationship between Expenditure and Income.

Our idea is that as income increases so does expenditure. For time-series data set, there is a need to find the natural logarithms of