3.4.1 Model 1
Based on the perceived functional relationship between VAT and GDP a link is forged between the two variables.
Thus, with the functional relationship and the resultant model using the ordinary least squares (OLS) regression
method we have:
Functional relationship
GDP = F(VAT) ………………….…….(1)
Converting this to a linear or stochastic model we have
GDP= b0 + b1 VAT + e ……………….. (2)
Where b0 and b1 are constants GDP= Gross Domestic Product, VAT = Value Added Tax
e = Error Term or Stochastic term, Apriori expectation: b1 > 0