Econometrics Assignment Example | Topics and Well Written Essays - 2000 words - 1

Econometrics - Assignment Example Q.2.Suppose the impact of institutions on growth differed between African countries and the rest of the world. First, comment on why the model in equation (1) cannot capture this effect. Second, write out a model which can allow for this differential African effect. Third, develop a test that would allow you to statistically discern if this effect is actually supported by the data. Yi is the impact of institution growth in a country i, Ri the protection against expropriation, Lati is the latitude country I (measured as the distance from the equator, and scaled to lie between 0 and 1), D Africa is a dummy for country i is in Africa and D Other i is a dummy capturing if country I is in any other and continent ÃŽ ² as the observations made. From table 1, the dummy for Asia is –0.62 and the dummy for Africa is -1.00. This indicates that African countries have little protection against expropriation. The values are natural logarithms of the stated values over a given base sample. Inverses of the natural logs give 0.5379 for Asia and 0.3679 for Africa. The difference is thus 0.1700. This is also equal to 32.1% growth difference. By measuring latitude as a raw number, the effect of climate on performance would not be as precise as it is when measured from the equator, which is the central latitude and the correlation between distance from the equator and economic performance would be known, but with extremes. This changes the coefficient of the index of institutions growth. The estimates would increase, errors would increase as well and the regression, now based on raw numbers for latitudes would significantly reduce. The ordinary least squares are used in testing the heteroskedasticity. The first step is to make OLS estimates, and the residuals saved in exponents squared. Then the squared exponents are regressed on all the variables and their squares. Then obtain R2. If nR2 is too large, the null hypothesis Ho is rejected. The auxiliary model can be seen as