Question
Following are the results of four regressions, in which M refers to the imports and Y to the GNP of the United States (both in
Following are the results of four regressions, in which M refers to the imports and Y to the GNP of the United States (both in billions of current dollars) from 1985 to 2000, and P is the consumer price index. The theory postulates that imports are directly related to the level of GNP and domestic prices
(1) =-108.20 +0.045Y+0.931P (1.232) (1.844) RP = 0.9894 R2 = 0.9877 F= 604.621 (2) =-69.97 + 0.112Y (32.08) R = 0.9866 F = 1029.40 (3) = -555.84 - 13.81P (42.18) R2 = 0.9922 F = 1778.84 (4) P = -1.39 + 0.202Y/P (12.22) R2 = 0.9142 F = 149.25
Explain
(a) why the first three regression results indicate the presence of serious multicollinearity and
(b) how the fourth regression attempts to overcome the multicollinearity problem
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