![]() You should now have a scatter plot chart of your data. In the Insert tab, click on the Scatter icon and select the first option. Mathematicians seem to simply call these scenarios "non-linear" or "curvilinear" relationships, without seeming to notice that there are invariably two distinct relationships being identified by the data. Follow these steps to start analyzing the residual plot of your regression: First, select the range that contains the data you will use to calculate a regression model. While I have always used the term "split" effect to describe such phenomenon, I have not been able to find this phenomenon acknowledged or identified (by any particular term) amongst economists or mathematicians. Conversely, a non-linear pattern in the residual plot with predominantly positive residuals in some ranges, whereas negative in others, indicates that the. Thus, we often see two or more different effects express themselves through a full range of data. This is because at very high rates of taxation, people either lose interest in working, or they start to seek ways of hiding their income from the government. However, after a certain tax rate is reached, we start to see a new effect take place wherein the tax revenue drops off as the tax rate is increased further. I call this phenomenon a "split" effect.įor example, in the Laffer curve, we at first see the government raise more tax revenue as tax rates increase because they collect more money from citizens. However, sometimes one effect drops off and then a new effect takes over. In economics, we're always interested in identifying "effects" that take place between variables. In Problem #3, illustrations A and B, you show something we see in economics quite a bit.
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