OECD economic regulation (model building). A study by the U.S. Small Business Administration modeled the GDP per capita of 24 of the countries in the Organization for Economic Cooperation and Development (OECD)

(Crain, M. W., The Impact of Regulatory Costs on Small Firms, available at www.sba.gov/idc/groups/public/documents/

sba_homepage/rs264tot.pdf ). One analysis estimated the effect on GDP of economic regulations using an index of the degree of OECD economic regulation and other variables.

(We considered this model in Exercise 28 of Chapter 18.) They found the following regression model.

a) If we remove Primary Education from the model, the decreases to 97.3%, but the adjusted increases to 96.7%.
How can that happen? What does it mean? Would you include Primary Education in this model?
Here’s a part of that regression output:

b) Consider the t-statistic for OECD Regulation in the reduced model. That was the predictor of interest to this author. Do you agree with his conclusion that OECD regulation reduced GDP/Capita in these countries? Why do you think he chose to include Primary Education as a predictor? Explain.

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Dependent variable is: GDP/Capita R-squared = 97.4% R-squared (adjusted) = 96.6% s = 2084 with 24 6 18 degrees of freedom Source Sum of Squares df Mean Square F-ratio 5 579015675 133 Regression 2895078376 Residual 78158955 18 4342164 Variable Coeff SE(Coeff) t-ratio P-value Intercept 10487.3 9431 1.11 0.2808 OECD Reg Index -1343.28 626.4 -2.14 0.0459 Ethnolinguistic Diversity -69.9875 23.26 -3.01 0.0075 Int'l Trade/GDP 44.7096 14.00 3.19 0.0050 Primary Education (%) -58.4084 86.11 -0.678 0.5062 1988 GDP/Capita 1.07767 0.0448 24.1 0.0001