Faculty of social studies department of economics supply response of tobacco output to price changes in
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- 3.3 Estimation procedure
- 3.4 Unit root tests
| Sales quota (SQ t-1 ) Sales (production) quotas refers to a limit on the amount of a product a producer is expected to produce or sell with the aim of avoiding overproduction so as to reduce variations in market prices and incomes (Colman, 1983). Sales quotas are typically set by the government or by a parastatal organisation. Since the supply of most agricultural products is influenced by institutional factors, a dummy variable was included to capture to capture the effect of sales quotas which were once imposed on Zimbabwean tobacco farmers. It takes the value of 1 for the years in which the sales quota applies and 0, otherwise. The dummy variable is lagged one period since institutional settings are normally announced before the start of the production season. The dummy variable was also incorporated by Leaver (2004) and found a negative sign hence in this study a negative relationship is also expected. 3.3 Estimation procedure Although the ordinary least square (OLS) approach treats regression relationship as deterministic whilst time series contain stochastic trends, the approach is preferred to other estimation techniques amongst the Maximum Likelihood (ML) and Method of Moments (MoM). This is because the least square approach produces estimates which are unbiased, efficient and 14 consistent as stated in the Gauss-Markov theorem of the classical linear regression model (CLRM). E-views 7 statistical software package was used. 3.4 Unit root tests Non-stationary data result in spurious regression, therefore testing for data stationarity is essential. There are several unit root tests which include the Dickey-Fuller test, the Augmented Dickey-Fuller (ADF) and the Phillip-Perron test but the ADF test was used in this study because it corrects for serial autocorrelation in the residuals (Wooldridge, 2008). If the absolute ADF test statistic is greater than the critical values then the series under consideration is said to be stationary. Series found to contain unit roots are differenced until they are stationary. Download 1.11 Mb. Share with your friends:
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