Chapter 2

The Method of Least Squares

The Logic Behind Regression Procedure

The method of least squares, or the regression analysis for a model with one variable, is sometimes called the ordinary least squares (OLS). In this method a line, similar to equation (1.1) in Chapter 1, is claimed to represent real-life data such as the income and consumption data for the US for years 1990–2010, which are plotted in Figure 2.1. Each dot on the graph represents a pair of income–consumption data for one year. The data are not sorted because doing so would not create any difference in the analysis. An attempt to have a line graph where data points for consecutive years are connected will usually present a meaningless graph. Therefore, the customary way ...

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