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5 Tips to enhance personal finance and liquidity

How can you enhance personal finance and liquidity during/after the corona-pandemic? Today, we would like to give you 5 tips about how to enhance personal finance and liquidity. With this modern era (amid the pandemic) being so tough on our pockets, we should ensure the meager resources at our disposal are utilized to their maximum efficiency. Read the following 5 tips (easy steps) about how to enhance personal finance and liquidity. Hopefully, they will helpfully accompany your journey to your financial stability and independence.

1. Set your budget (expenditure)

Draw up a budget. A budget is a plan on how you will spend your money. A person without a plan has no direction, and therefore no control over their resources. Write down a list of regular and irregular expenses. Regularly check whether the maximum expences are respected. Make sure you cut your court according to your size. Gain control over your money with a budget.

2. Remember to save (liquidity)

The bigger the package the more you save. Generally, it will cost more to process and package 4 bags of a product (weighing 1kg) than it would cost to package the same product in 1 bag (weighing 4kg). How do you plan your buying strategy? A bulky bag will cost less per unit (1 kg) than a smaller package (1 kg). Remember that the discount on bigger packages isn’t usually a true discount. The seller offers you the cost-degression-effect incurred by the large bulk-buying-behavior. But also ensure you do not overbuy and end up wasting products by having them expire on your shelves.

3. Inform your self about the market

Do some window-shopping. Strap on your walking shoes and head out for some reconnaissance. Do more than simply checking prices. Ensure the quality of the product and also beware of knockoffs, imitations, and counterfeits. Actively ask for discounts and information about upcoming offers (Read the next tip).

4. Headhunt seasonal sales and discounts

Seasonal Sale! Different products will experience varying demands throughout the year based on weather & climate, fashion trends, availability of raw materials, etc. Stores usually look to clear-out their shelves before certain seasons begin in a bid to make space for the new seasons’ products. For people living in the Northern Hemisphere, a good example would be cold-weather products being on sale in February as stores look to bring in summer products. Do some research on your area and find out which products are on sale in each part of the year.

5. Differentiate between needs and wants

Do you plan for your needs beyond your basic needs? Differentiating between your Needs and Wants is vital when drawing up your budget. First, consider your basic needs. You need shelter (rent money), food for vitality, some clothes for warmth (and common decency), and Education to safeguard your future. Secondly, assign a portion of your budget to serve needs beyond your basic needs (Maslow’s hierarchy of needs). For instance, you should also budget for your hobbies.

Personal finance and liquidity

With these 5 easy steps, you could save up some money and be that much closer to affording that dream vacation or buying that dream car, among other wants. Start your journey today! Enhancing your finances and liquidity is essential. It will help you cope with the impact of the current corona-pandemic and economic crisis. Do you have any more tips on how to save up your money? Let us know in the comments section.

5 Tips to enhance personal finance and liquidity
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The Technique of Scientific Writing in Economics

Since I started training individual students from several economic faculties in German Universities about the technique of scientific writing, they asked me where they could find some inspiration to get an appropriate topic for their Bachelor and Master thesis. Depending on the regulations of your university, the supervising professor or lecturer may suggest a specific topic (area of research). Another alternative, the lecturer may give you handouts as an inspiration (starting point) for your research and expect that you will define your own specific research question and then consult with them to fix the final topic. Before you spend a lot of time beating about the bush on how to come up with a convincing draft, your proposal should contain the following ingredients: (research topic, abstract, table of content that shows a clear argumentation line, list of literature sources, model, methodology).

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How to design your Economic Research Topic for your Thesis

To arrive at your final convincing draft, you will need to observe the following sub-processes.

1. Define the Economic Problem in your Thesis

Designing your economic research topic begins with the definition of the economic problem you would like to review and analyze, e. g. such a topic “The impact of global trade imbalances on the European Union (EU)”. In such a topic, the economic problem is the “global trade imbalances”, while the “European Union (EU)” limits the context of the analysis.

2. Construct a Mind-Map for your Economic Problem and Context

At this point you should draw a mind-map depicting two general areas: (a) global trade imbalances and (b) European Union (EU), connected with an arrow from (a) to (b) to resemble (c). This and its impact is your main focus in dealing with the economic problem and the chosen context. Using a mind-map you can develop relevant keywords relating to your topic and potential theories that relate to each topic area, e. g. in (a) global trade imbalances is a macroeconomic topic on international trade, while (b) European Union (EU) is also an economic topic of economic policy (institutions), economic integration, international economics as well as international trade. This should give you a hint about the topics you should be familiar with or the literature you should consult.

3. Create spontaneous Mind-Maps and Literature-based Mind-Maps

Each time you need an idea for your thesis contract a mind-map out of your spontaneous knowledgebase. Afterwards use literature sources to construct literature-based and specific mind-maps of what a certain source delivers to you. Now you should have more than one mind-map that talks about the same topic, but from different perspectives (inspiration). Look for commonalities between your spontaneous ideas and the literature sources. Apply critical thinking: ask yourself, why there are differences and whether other sources may help to bridge the gap or not.

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Topics in Economics

Read More about Economics

What is Economics?

What is Economics, and how can students define economics as a science? Therefore, our motivation in this article is to find a general definition of economics. In much of economic literature, there is also consensus and conflict on some description of economics as a science. So how do we start? To neatly define economics in lectures, we need a broad view of the term economics.

Consequently, Economics can be defined as an interdisciplinarysocial, and behavioral science. Therefore, economic research focuses on explaining the behavior of decision-makers. Economics also explains the implications of the behavior of the decision-makers that affect society at the microeconomicmacroeconomic, and political levels. Such an analysis of different decision-makers consequently needs an interdisciplinary approach. Decision-makers in economics are in particular private households, firms, and governments. 

Microeconomic level

At the microeconomic level, economics explains the human nature of making both individual rational and irrational decisions, social interactions, and behavior under risk. Individuals, organizations, and governments make allocation and distribution decisions daily, which economic subjects would like to evaluate. Economics derives the rules of determining; how efficient or optimal the decisions of economic subjects are. It, therefore, determines the necessary rules and coordination mechanisms usable in decision-making processes. Some of the coordination mechanisms include market, government, private, entrepreneurial coordination in an economy. An economy is the environmental unit of economic analysis. 

Macroeconomic level

Economics is also an environmental dimension of macro-environment analysis in the PESTEL-Framework in strategy management. Other PESTEL dimensions include the political, social, ecological, technological, and legal environment. At the macroeconomic level, economics discusses the aggregated effect at the level of the whole economy using the six macroeconomic objectives (magic hexagon).

Policy Level

At the political level, economics deals with the implication of economic decisions of different interest groups in an economy and derives policy recommendations to help maximize social welfare. Consumers, entrepreneurial, government interests are not always similar. Employees’ and employers’ political interests also differ. Therefore, economic policies are essential and help in balancing the different interests as well as maximizing the welfare of society.

Economics deals with Rational and Irrational Behavior

Evident in all economic literature is the issue of rational and irrational behavior as the central point of discussion. In economic theory, the economist tries to explain how people should make decisions depending on their goals and restrictions they face. Rational decisions are those decisions that respect the restrictions and goals of an individual, while irrational behavior could e.g. incur either a higher cost (not respecting restrictions) or lower utility (not respecting the goals) as compared to the rational decision. Rational decision is influence by the cost of opportunities.

Economics is about the Maximum and the Minimum Principle

Economists derive two principles of decision-making that drive the process of making decisions within economic subjects. The maximum principle and the minimum principle.

The Maximum Principle

The maximum principle suggests the following: Attain the maximum output with a predefined amount of inputs.

What is economics?
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The Minimum Principle

The minimum principle suggests the following: Utilize the minimum input to attain a predefined amount of output.

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How to research about Economics

Find a detailed definition of Economics in the International Encyclopedia of the Social & Behavioral Science (2001, Pages 4158-4159) via Science Direct.

Understanding the definition of Economics

In order to understand Economics, it is essential to differentiate between decision-making from three different perspectives: private consumption and income decisions, public consumption and revenue generation, entrepreneurial production and supply of goods and services in an economy. As discussed above, economics is the science of rational decision-making. Firstly, economists try to explain how economic subjects make rational decisions, the limitations of rational decision-making, human interactions and their outcomes. Secondly, economists try to capture the limits of rational behavior and explain how decision-making takes place under imperfect environment conditions; e. g. information asymmetries, uncertainty, imbalance in power between decision-makers … etc.

Economic subjects

The concept of economic subjects is the notion of viewing people in an economy as (1) private households, (2) as firms (or organizations) and as (3) the government (also a form of organization). In general, this means that there are three economic subjects;

  • Private Households
  • Firms (private and public organizations)
  • Government (Public household and organization)

What is an Economy?

An economy is the analytical unit of interest for all economic analysis and includes the people, biosphere and all resources available e.g. a political unit (e.g. Germany, China, France, Ghana) or a unit specified by certain characteristics such as a continent, a supranational unit, an international coalition of nations, etc.

What has happened to American Democracy?

What has happened to the American Democracy?

A nation certainly built on the foundation of democracy should not experience such chaos. However, what the world has had to watch is definitely unprecedented. What has subsequently happened to American democracy, and how deep has it fallen? The world should consequently stop only watching. It is time to help Americans regain insight into the democratic rule of law. What happened to the rule of law, constitutionalism, the peaceful transition of power, …, etc? In the current scenario of the American Democracy in The United States of America (USA), the global community should certainly be astonished, if not disappointed about how the constitutional order has developed. Moreover, we have watched a leader fail his nation from all forms of decent argument and respect of law and order. Because of such collective ignorance, American democracy has certainly sunk so low.

“Our Democracy is under assault. … The words of a president matter.”

Joe Biden (06.01.2021 – 22:07 GMT + 1 Hrs)

The darkest moment of American Democracy

Today all nations should consequently reach out to their American allies. Most importantly, it is time to remind Americans about democracy in their darkest moment of American Democracy. Leaders should stop rubbing shoulders with any categorical support of any unconstitutional acts. What has happened is irreversible damage to American Democracy. A demagog has unfortunately sabotaged a legitimate constitutional, legislative, and electoral process. A person without any sense and sensibility of respect to any code of conduct. In the spirit of the United Nation’s Human Rights Charter, in Article 30:

Nothing in [the UDHR] Declaration may be interpreted as implying for any State, group or person any right to engage in any activity or to perform any act aimed at the destruction of any of the rights and freedoms set forth herein.

United Nations Human Rights Charter, Article 30 of The Universal Declaration of Human Rights.

The global community should think about maintaining the rule of law and constitutional order and therefore protect the will of the people from all forms of bigotry. Such a form of bigotry consequently affects the ability of the global community to reach a higher standard of human rights. If the type of political leadership at any level has such a low level of respect to the sovereignty of the people in the world. We should remember Great Leaders such as Nelson Mandela in South Africa, who never gave up on the fight for democracy. But they never lowered the standard below the dignity of all people. They never looked at the many years of oppression through the Apartheid system but sought a peaceful process.

Shame from the land of the American dream

What has happened to American democracy is a shame to the American dream. We have never seen such scenery in the USA. Many generations of people around the world have longed for the American dream. However, what has happened to American democracy is a shameful incitement. A distortion of peaceful means of the transition of power. Meanwhile, those who have incited people to act in such a shameful way are enjoying the safety and prestige of their political office. The world can finally conclude as follows. The demagog has consequently submerged the American patriotism in a mess of conspiracy theories and “alternative facts”.

Unite American Democracy

Let us all send a message of encouragement to the American people. First and foremost, unite across all social groups and respect the rule of law. Above all, seek peace and give each other a chance of existence. Because the greatness of your nation depends on peace and social stability preserved by all of you. To clarify, forget the divide and hold on to your principles of democracy. Avoid the trap of becoming a banana republic. Public service should be a service to the people, the sovereign. It is not the property of any person in this universe.

Finally, this should be a lesson to the world. That a presidency equipped with too much power is a danger to democracy and the rule of law. Additionally, autocracy and dictatorship are a danger to all people and their sovereignty. If this has shaken American democracy, then what is happening in people living under such conditions? Do Americans consequently want to live under such conditions? Think twice and reflect on outcomes and impact now and in the future. The life of current and future generations is in your hands.

Happy New Year 2021

Happy New Year 2021

In just a few hours, a happy new year 2021 begins. We wish you a Happy New Year 2021 despite the challenges of the Corona Pandemic. No matter how you choose to start the new year, always be resilient. That’s because resilience gives you the power to create momentum from negative lows into positivity. What you experienced in 2020, whether positive or negative, is part of your life history. History or your life story is unchangeable, but your future is free and open to you. Be the captain of your ship in the new year 2021. Write your life story better now.

Review 2020 – Make a closing balance sheet and profit and loss statement.

Before 2020 becomes history, you ought to review your balance sheet and income statement. Start on a new page in the new year. Why is a review of the year so important, and why should you have a fresh start? Basically, it’s about letting go of the old year, letting it go, and reflecting back to learn lessons from the past year. Because the new year is a chance for a fresh start. Your current closing balance shows how much motivation is still left. Where your inspiration comes from, too. Your Self-motivation is your equity for next year. The inspiration from family, friends, work, and from society is your debt capital. The more self-motivation you can provide yourself, the better equipped you are for the new year. How well your self-motivation stands depends on your profit or loss in 2020.

New Year Outlook 2021 – Prepare an initial balance sheet and set your profit target and a loss limit.

To successfully move forward in the new year 2021, you need to set your annual goals. While defining your vital goals for 2021, remain open to discovering new things throughout the year. Be a breathing system that perceives potential opportunity and risk from its environment. Out of that, you can adjust your life strategy for 2021 as the year progresses.

But how can you derive your goals for the new year 2021? From 2020, derive your 2021 opening balance from the 2020 closing balance and the 2020 income statement. Whatever your 2021 life goals are, pay attention to your resilience. The source of your intrinsic motivation should not run dry. Therefore, set a profit goal and a loss limit for the new year 2021. Still, consider what might help you if losses or gains in 2021 are lower or higher than your set goal.

Our Strategy – Digital Learning 2021

Our strategy in 2021 is to continue to develop our digital learning programs. This includes expanding our online instructional offerings via Zoom for individual students, high school students, online consultations for startups and entrepreneurs in our region. We will not begin traditional on-site business until the Corona pandemic in Germany and globally begins to decline. We would like to avoid the risk to the life and health of our clients. Because the gain on risk avoidance is that together we can take new digital learning paths and optimize our learning processes. Be part of it and find out more about our digital services.

Introduction to Financial Accounting

Introduction to Financial Accounting

This introduction to financial accounting is meant to introduce financial accounting topics to beginners. Students learning a business administration subject in a university can also benefit from this introduction to financial accounting. First, let us clear the question, what financial accounting is all about. Well, financial accounting is about the chronological and systematic recording of all business transactions that occur in a firm. Chronological recording means that all transactions are ordered by period and time, while systematic recording means that there are accounting categories and rules to be observed.

Why your Business needs Financial Accounting

Secondly, for which reasons do we carry out financial accounting in Business Administration?

  • Self-information: As a business owner, manager, or employee, we would like to self-inform ourselves about business performance and the situation in our firm. Let us start with the basic strategic questions. What is the value of assets, equity, and liabilities in your firm? Is your business earning a profit or a loss? Do you have enough liquidity to serve all liabilities that your business owes the creditors? You will need to answer these basic as well as other strategic questions. All your analysis will start with the evaluation of the financial statement.
  • Record of Evidence and Accountability: We should also consider the need to actively provide adequate evidence of all activities of the firm. That means that by providing evidence of business activities, we can be held accountable for the outcomes. Our Balance Sheet and Income Statements provide evidence of the resulting outcomes of our business activities. For instance, creditors may want to know the company´s valuation of Assets, Liquidity, Equity, Liabilities, Expenditure, Sales, …, etc. By doing this creditors may decide whether they want to continue to have a business relationship or not.
  • Regulatory and transactional purposes: Governments may require us to do a tax review, while other third-parties (Banks, business partners) may require us to provide information during certain transactions, e.g. Creditors want to know whether we have securities to cover the credit applied for.

Basic Structure of Accounting

Further introduction to financial accounting looks at the basic structure of accounting. While doing accounting, you will come across the term “double-entry accounting”. The term “double-entry” means that you will carry out financial accounting as a record on stocks and as a record of income. On the one side, you will set up a record of the stock valuation of assets, equity, and liability in a Balance Sheet. On the other side, you will also have a record of outflow through expenditure and inflow of revenue in an Income Statement (Profit and Loss Account). But that is not way the end of financial accounting. We need to account for the flow of liquidity using a cash flow statement. Cash flow statements provide information about the flow of liquidity in and out of your business in the short-, medium- and long-run.

Balance Sheet

A Balance Sheet provides information about the value of assets, equity, and liabilities of a firm on a specific date (point in time). Therefore, the balance sheet only shows the stocks on a specific date, e.g. “Balance Sheet as of 31.12.2020”. The balance sheet is drawn as a T-account with two sides, left and right. The (left) debit side of a balance sheet shows the value of assets, both long-term and short-term assets. The (right) credit side of a balance sheet shows the value equity owned by the firm and both long-, medium-, and short-term liabilities. In practice, you will generally record the entry and exit of all assets, and liabilities. The reason why you record the value of assets and liabilities is to enable you to estimate the value of equity in your firm.

Income Statement, Profit and Loss Account

Now, equity is also affected by revenue-generating activities like sales of merchandise and revenue-consuming activities like expenditure für employees. That requires you to also keep a record of sales of goods and services as well as expenditure incurred. Afterward, you summarize the net outcomes in the income statement (or profit and loss account).

Cash Flow Statement

Finally, it is unaviodable to create a cash flow statement of your business, if you want to have an overview of the flow of liquidity in your firm. You can observe the short-, medium- and long-term liquidity cash-flows. The short-term focuses on immediate in- and outflows (daily, weekly and monthly). On the other side, the medium-run observes the expected flow of liquidity between 2 to 3 Months. Lastly the long-term liquidity cash flow statement can be designed for more than 3 months.

Which European City Will Replace London As Europe’s Financial Capital

Which European City Will Replace London As Europe's Financial Capital

Over the last century, London has established herself as Europe’s financial capital by ensuring and developing economic certainty, legal stability, political stability, and globalization. These four major achievements have placed London far above other European Cities in attracting business and investments and established London as Europe’s Financial Capital. Which role will London play after Brexit? Which European city will replace London as Europe´s financial capital?

Brexit creates economic uncertainty, legal instability, and political instability as Britain implements her new constitution. This instability and further challenges like Euro-clearing and pass-porting, highlight the effects of Brexit on London and her ability to remain as Europe’s financial center. Europe needs a new city as it´s financial capital to replace London, which ceases to be a European city

Britain has further failed to reach a Trade Agreement with the EU, provoking a hard Brexit ahead of the deadline for a deal. The remaining European Union member states must then find a suitable replacement for London to ensure the stability of the EU as a global financial marketplace.

Here we take a look at 10 European states that can replace London as Europe’s Financial Capital:

1. Paris, France.

france landmark lights night

Paris could rank first in replacing London given her reputation as a business center, accessibility to other global markets -bolstered by her technological advancement, multicultural environment, infrastructure in telecommunications and transportation. The French Government has also ensured a favorable climate for business. The added availability of qualified staff with efficient spoken languages places Paris on the radar of any business looking to establish itself away from London. Similar to Financial Times, we can pose the question: Is Brexit London´s loss and Paris´s gain?

The major issues that remain in Paris are the high costs of office space and staff and the pollution levels in the city. Working and living in Paris will challenge you to learn the French language and culture, but still have a chance to connect with the English speaking global community.

2. Frankfurt am Main, Germany.

architecture bay bridge buildings

Frankfurt, the German financial city ranks favorably given her reputation as the financial heart within Europe, a business center, access to global financial markets bolstered by infrastructure development in telecommunication and external transportation systems (FRAPORT). Most international air travel through Europe pass through Europe’s largest Frankfurt airport. Frankfurt also hosts the European Central Bank (ECB) as the center of Europe´s monetary policy and the center of German´s monetary policy with the German Central Bank. As one of the most international cities in Germany, Frankfurt, therefore, offers ample availability of qualified staff and office space, and efficiency in languages spoken. However, the cost of staff remains high while the quality of life of employees can be better in the city.

A study carried out by the Ifo Institute in 2018 aimed at quantifying the medium and long-term implications (quantitative effects) of Brexit for the economic and employment development of the German state of Hesse (Ifo, 2018). Their quantitative effects were estimated using the New Quantitative Trade Theory Models (NQTT-Ms), which is a modern CGE (Computational General Equilibrium) model, newly calibrated to quantify the state-specific effects of the State of Hesse. The findings of the Ifo Institute Study tell an optimistic story. The Ifo Insitute found that the metropolitan city of Frankfurt should expect a lower negative impact at the state level. In “soft Brexit” the impact is optimistic than the impact in a “hard Brexit scenario.

3. Amsterdam, Netherlands.

The city of Amsterdam is well known for the business climate created by the Government. The city has a reputation as a business center and this acts in self-promoting businesses established in the city. The languages spoken are efficient for businesses. These organizations also enjoy a pollution-free environment.

4. Berlin, Germany.

Berlin is easily recognizable as one of Europe’s top business cities. The city’s value for office space is also an added advantage for businesses looking to establish themselves in Berlin. This is bolstered by high-quality infrastructure in telecommunications, and internal transportation systems. The languages spoken in the city are also efficient for business organizations.

5. Barcelona, Spain.

Businesses looking to establish themselves in Barcelona will enjoy the availability of office space and good quality of life for their employees. The city’s reputation as a business center will also self-promote any businesses established in the city.

6. Madrid, Spain.

Madrid offers businesses readily available office space, qualified staff at favorable costs with a good quality of life for employees. The city has a reputation as a business center with good market accessibility. This is bolstered by the city’s developed infrastructure in telecommunications and its internal transportation system.

However the city can better manage its pollution levels.

7. Brussels, Belgium.

Brussels could also serve as an attractive financial center as the “European Capital” of the European Union hosting most of the European Institutions:

  • The Council of the European Union
  • The European Commission
  • The European Parliament (Brussels, Luxembourg, and Strasbourg)
  • … and others.

Businesses established in Brussels enjoy the availability of qualified staff with an efficient language spoken in the city. The reputation of the city self-promotes the businesses established in this city. The infrastructure systems in telecommunication and external transportation are also excellent.

The cost of staff in Brussels is however a red-light for most businesses.

8. Munich, Germany.

Munich enjoys a reputation as one of Europe’s top business centers. The businesses established in this city enjoy self-promotion, availability of qualified staff with good quality life, well-developed infrastructure systems in telecommunications, internal transportation, and external transportation, and freedom from pollution.

However, availability of office space, value for money for office space and cost of staff remain quite high in the city.

9. Zurich, Switzerland.

Zurich offers the availability of qualified staff within an excellent business climate created by the Switzerland Government. It has excellently developed infrastructure in telecommunications and both internal and external transportation systems. The languages spoken in the city are efficient in a pollution-free environment with an excellent quality of life for employees.

The value for money for office space and availability of this office space are a major issue. The cost of staff is also high. 

10. Milan, Italy.

Milan enjoys a good reputation as a business center with good market access. Businesses established in the city will enjoy self-promotion from this reputation.

However, the business climate created by the government is quite negative. Value for money for office space and pollution in the city remains a major issue.

Financial Education from Financial Times

Linear Regression

Linear regression belongs to the econometric methods of empirical research, which are applied in almost all sciences. Linear regression is a set of econometric methods of estimating statistical causality between two or more factors (variables of interest). A central assumption of linear regression is the ceteris paribus condition, which means nothing other than “if the conditions are the same” or “if other factors are kept constant“. The literature on linear regression can be found in almost every textbook on statistics, textbooks on econometrics, and research literature on methods of empirical economic research.

Simple Linear Model

In a simple linear model, it is assumed that only one variable $x_{1i}$ has significant impact on variable $y_i$ and all unexlained variance is explained by the error term $e_i$.

y_i=\beta_0 + \beta_1 \cdot x_{1i} + e_i \, \text{or} \, y_i=\beta_0+\sum_{j=1}^{k=1} \beta_i \cdot x_{ji} + e_i

Multi-Regression model

y_i=\beta_0 + \beta_1 \cdot x_{1i} + \beta_2 \cdot x_{2i} + ... + \beta_{k-1} \cdot x_{(k-1)i} + \beta_k \cdot x_{ki} + e_i
y_i=\beta_0+\sum_{j=1}^{k} \beta_i \cdot x_{ji} + e_i

Why is the linear regression method used in science?

Scientists use the regression method to explain the statistical causality between two or more factors so that they can identify the potential statistical correlations in their research question. However, a researcher also wants to test whether statistical estimates reflect reality, or at least whether the observation in the sample of his/her observations reflects reality in the population. Regression methods can be used to calculate or analyze relevant factors in a research question. While regression calculation aims to estimate the relevant coefficients (causality estimators), regression analysis aims to test relevant empirical hypotheses (inferential statistics).

Where is linear regression applied in economics and business administration?

Consider the following example. As an economics student, you are used to reading the following statements in almost all economics and business administration textbooks: “The law of demand says that when prices rise, the demand for a normal good falls”. Where does the statement of the law of demand come from? Can this assertion be proven empirically? When is a good a normal good? Although the answers to these questions can be found in any textbook, the background to their justifications and sometimes incomplete explanations are more likely to be found in empirical research using econometric methods.

Economists work with theoretical models that can be empirically tested to determine the extent to which they reflect your research question in reality. In the case of the law of demand, the Cobb-Douglas model can be applied, which assumes constant elasticity of demand. Here is where the first problem arises. This Cobb-Douglas theoretical model is not linear, as required by linear regression methods, but a non-linear (multiplicative) model. Utilizing the logarithm, however, the Cobb-Douglas model can be transformed into a (log-to-log) linear model (linear transformation). With a sufficient sample, a regression model can be estimated to statistically verify the claims. This example is one of many other applications of empirical analysis to test economic theories.

Simple and multi-regression analysis

In econometric regression analysis, a distinction is made between simple regression analysis and multi-regression analysis. In simple regression analysis, two factors are examined, e.g. a macroeconomic hypothesis could be that domestic consumption (C) has a positive influence on domestic income (Y). The propagated causality is that domestic income depends on domestic consumption – Y(C).

Econometric models start with a simple regression between two variables.

The aim of econometrics is to estimate empirical models that confirm or even refute the propagated causality between domestic consumption and domestic income of a country in the given population. The reverse causality, however, is also possible that domestic consumption tends to depend on domestic income – C(Y). Now, such an analysis, Y(C) and C(Y) takes place under the assumption of the ceteris paribus condition.

The simple regression is then extended by further variables – forming the multi-regression model.

Due to the ceteris paribus condition, the explanatory power of the simple model is limited to explaining the potential causality between domestic consumption and domestic income of a country, but without reference to other potential causalities between other (non-) observable factors, e.g. domestic and foreign investment, exports, imports, government expenditure, savings, taxes, etc. For this reason, the simple regression model is extended. If we now extend the propagated causality to other potential causalities, this results in the multi-regression model, e.g. domestic consumption (C) is influenced by disposable income (income (Y) minus taxes (T)) and other factors, the classical macroeconomic theory of consumption according to Keynes.

C(Y_V)=c_1Y_v+c_0
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