ABSTRACT
Econometric models are constructed on the basis of a number of simplifying assumptions necessary to start the process of empirical analysis. For example, to conduct an empirical analysis of the import demand function in the previous chapter, we made the following simplifying assumptions:
The relationship between imports and its determinants can be adequately presented by a log-linear equation (specification assumption).
The disturbance term is normally and independently distributed around a mean of zero, with a constant variance.
Note that there are in fact four assumptions included in this statement. These are:
the normality assumption;
the non-autocorrelation assumption;
the zero mean assumption;
the homoscedasticity assumption.
The regressors are non-stochastic and are measured without errors.
There is no exact linear relationship among the regressors/independent variables.
