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| | Leading Issues in Economic Development | EIGHTH EDITION | | —_ | GERALD M. MEIER Stanford University JAMES E. RAUCH University of California, San Diego New York Oxford _ OXFORD UNIVERSITY PRESS 2005 Oxford University Press Oren Now Yrk Reallnd, Banglk Bueros Aires Cape Town Chen Deresseloom "Dshi Heng Kong. ental Korat Koll Kudu Lmpur Madd Nalboore Miso Cty, Mumbo! Nebebi S50 Poulo Sharghas Tepe) Tyo. Teento Copyright © 2005 by Oxford University Press nc ‘bib by One Use Pres, ne 198 nod Arce, Now Yoke Now rk O01 bpd Foe ee Ceri reid ek of Ord Urey rst ‘Al righs ane, Nop of is peony be raped, see er ptm ar Westen for of ry 0, ‘Secvorie meson, holoopying, recording, or ohare, ‘shou epi painion of Orford Univers Press, Ise 12:9780.19-5179606 [sah 0-19-5179609 ining oe igh 87 65.49.21 iid i fh Und Sees oF Areca (or oid ee paper APPENDIX: HOW TO READ A REGRESSION TABLE National accounts, social indicators, and other dats have been accumulating for most less de- veloped countries for more than 40 years. Writers on development frequently apply the tech- nique of multiple regression to these data to estimate What they believe are underlying behav- ioral relationships atnong various economic, politicl, and socal variables. They report their results in regression tables ‘A number of selections ia this book contain regression tables. Fortunately, lack of training in econometres or statistics need not prevent the reader from understanding the important économie (as opposed to statistical) information contained in a regression table. The purpose ofthis Appendix i to show the untrained reader how to extract this informetion, using as an illustration a table adapted from the widely cited paper by Robert J. Barro, “Economic Growth in a Cross Section of Countries.” Quarterly Joumal of Economics 106 (May 1991): 407-43. The presentation applies to multiple regressions pecformed using a method called or- dinary least squares, but the most important aspects of the discussion carry through even if other methods were used. ‘A regression table is read one column at atime. Each column reports an estimated relation ship between the values of a dependent variable, y, and the values of a set of explanatory Variables, x1, Xp --» Xa Where { indexes observations and K is the number of explanatory variables. This estimated relationship takes the form Yee Dot bye + Bata + Betas ec @p ‘where the mumber by is the constant or intercept, the numbers by, ba, ... Bg ate the estimat- ed coeficients, and ¢:is the residual. The quantity bo + byt + Bata, +. +byrxis the pre- dicted value ofthe dependent variable for observation i, 0 called because it gives the value of, te dependent variable we would predict for observation i given knowledge of the values of the explanatory variables for observation i. It follows that the residual i simply the difference between the actual value of the dependent variable and its predicted value for each observa- tion. By construction, the average or mean ofthe predicted values taken overall observations equals the mean ofthe actual values; equivalently the mean ofthe residual is zer0. AS a con- sequence, if we know the estimated coefiicients and the means of the dependent variable and tho explanatory variables, we can compute the constant Dy= 3 Dib — bok ~-- bx (2) ‘where the har over a variable denotes its mean ‘The estimated coeflicients are the same for al observations because they aré supposed to be estimates of underlying behavioral relationships between the dependent variable and the ex- planatory variables. The estimated coefficient dy, for example, tells us that a one-unit increase inthe value ofthe explanatory variable x, should cause the value of the dependent variable to increase by b, units, holding the values ofall other explanatory vasiables constant. These esti rated behavioral relationships are the most important economic information contained in & regression table. ‘With these preliminaries out ofthe way, we now turn to Table 1 In all regressions reported, an observation consists ofthe values of the dependent variable and the explanatory variables for one country for one time period. The number of observations used to estimate the coeff- co oe APPENDIX ‘Table 1, Regressions for per Capita Growth o @ o @ Depvae GRAOSS —GRIORS— 1.963, ot bjs, > 1.96 we can be (at least) 95 percent confident that By is positive. Similarly, if b, is negative, then if [b| > 1.965, or Jbys; > 1.96 we can be (at least) 95 percent confident that ys negative. Put differently, if the absolute value ofthe ratio b/s, exceeds 1.96, we can be 95 percent confident that explanatory variable j has some impact on the dependent variable in the direction indicated by the estimat ced coefficient. If we cannot be at least 95 percent confident (or, sometimes, at least 90 percent confident, it s conventionally argued that explanatory variable should not be considered to or os APPENDIX be part of the “true” model (A3). For this reason the ratio b's, Known as the t statistic for the coefficient 6, is often reported in regression tables in parentheses ndemeath the coefficient instead of s;. Note that if t statistics are reported instead of standard eerors, the standard exrare can be recovered by dividing the estimated coefficients by their ¢ statistics. (It is customary to state that, ifthe absolute value ofthe statistic for b; exceeds 1.96, we can reject the hypothe. sis that B, =0. Equivalently, it is stated that bis significantly different fram zero atthe 95 per- cent ievel, or sinoply that b is statistically significant. We prefer not to develop the concept gf hypothesis testing here.) ‘We now return for the fina time to Table 1, We can easily compute that al estimated coef- ficients in columns (1) and (2) have ¢ statistics larger than 1.96 in absolute value, This remains ‘rue in column (3) except forthe coefficients on SECS0 and PRIMS0, which have statistics of 151 and 1.33 in absolute value, respectively. We can conclude that SEC50 and PRIMSO are superfluous explanatory variables, which is not surprising given the inclusion of SEC60 and PRIMGO. In column (4) ll estimated coefficients have ¢ statistics that exceed 1.96 in absolute ‘value except forthe coefficients on SEC6O and ASSASS. The ¢ statistic of 1.90 for the coetti~ cient on SEC60 indicates that we can be 90 percent (but not 95 percent) confident that SEC60 hhas some positive impact on GR6085, while thet statistic of 1.53 (in absolute valuc) for the coefficient on ASSASS indicates that we cannot be even 90 percent confident that ASSASS hs some negative impact on GR6OSS. We noted cartier that the addition of the dunumy vati- ables AFRICA and LAT. AMER. reduced the coefficients on most ofthe other explanatory variables (in absolute value). For SEC60 and ASSASS the changes were substantial enough, so that by conventional standards inclusion of the former in the “truo” model is now marginal and inclusion of the later is no longer justified. ‘The reader who wishes to écepen his understanding of multiple regression can consult any econometries text. Two popular texts are Damodar N. Gujarati, Basic Econometrics, 4th ed (New York: McGraw-Hill, 2003) and Jeffrey M. Wooldridge. Introductory Econometrics: A ‘Modern Approach, 2nd ed, (Cincinnati: South-Western, 2003),