1. Download the latest version of GRETL. Click GRETL to download the new version to your personal computer. Click the link to gretl_install.exe for the program and data files and the link to manual.pdf for the complete manual. Choose any location in the USA from which to download and click the appropriate box. Keep all default settings.

2. Run GRETL, and select FILE, OPEN DATA, SAMPLE FILE, data8-1, and click OPEN.

3. From the menu in the top row, select VARIABLE, DEFINE NEW VARIABLE. In the box, type YRS2=YEARS*YEARS and click OK. Repeat this and generate YRS3=YEARS*YRS2, YRS4=YRS2*YRS2, and LNSALARY=ln(SALARY).

4. From the top menu, select MODEL and OLS procedure. Then click LNSALARY and the CHOOSE button. This will select the dependent variable. Next select YEARS and the ADD button. Repeat for YRS2. This will specify the model as LNSALARY = b1 + b2 YEARS + b2 YRS2 + u. Click OK to run this regression.

5. Click MODEL DATA and DEFINE NEW VARIABLE. In the box, type ut=uhat. This will save the residuals uhat as the variable ut. Repeat this process and create the new variables usq = ut*ut, absut=abs(ut), and lnusq=ln(usq).

6. In the window that lists the variables, click MODEL, CHOOSE usq as the dependent variable, and the constant, YEARS, and YRS2 as the independent variables. Click OK to run this regresion.

7. Repeat the above steps using alternatively, absut and lnusq as the dependent variables and the same independent variables.

8. For the White's test, repeat Step 6 but add YRS3 and YRS4 to the list of independent variables. Note that chi-square d.f. is 4 for this LM.

9. From the main menu click SESSION, save save session as PS8-2a. The commands you used will be saved as PS8-2a.gretl and the regression output as PS8-2a.txt.

10. Print out the text file PS8-2a.txt.

11. For each auxiliary regression, copy the value of the unadjusted Rsquared. Compute the value of test statistics, LM=nRsquared. Under the null hypothesis of no HSK, LM has the chi-square distribution with d.f. equal to the number of restrictions. For the first three models, the d.f is 2 and for White's test, it is 4. Use the chi-square table inside the front cover of the book and look up the critical values for the level of significance 0.001. Using the LM values you got and actually carry out the test.

12. Write a report describing what was done in each step, the conclusion of each test for heteroscedasticity and your overall assessment as to whether OLS is adequate for the model or, if inadequate, state the reasons.

12. THIS IS A PRACTICE SESSION AND NOT TO BE TURNED IN. Soon I will give you an assignment to be turned in. The practice session is to help you understand GRETL and the methodology.