The following problems consider one of the big questions in economics -- what are the determinants of economic growth? One theory holds that trade spurs growth: an economy that is open to foreign trade and to foreign investment can introduce new industries, so workers can get better-paying industrial jobs instead of low-paying agricultural jobs. In this problem set, you will quantify some basic relationships -- correlations and bivariate linear regressions -- between growth and trade.

The data set for this problem, growth.dta, can be found on the course web.

1. Using STATA, compute the sample mean and standard deviation of growth and tradeshare.

2. Estimate a regression of growth on tradeshare, using the "robust" option.

(a) What is the coefficient on tradeshare? Explain in words what it means. Is the numerical value of your estimate large or small in an economic (real-world) sense?

(b) Graph the data points and the estimated regression line. (Please attach a graph from Stata.)

(c) Is the slope coefficient statistically significantly different from zero at the 5% significance level? Show how you reach this conclusion.

(d) Report the 95% confidence interval for

22

, the slope of the population regression line.

(e) What is the

2R2

of this regression? What does this mean?

(f) Compute the correlation coefficient between growth and tradeshare, and compare its square to the

2R2

. How are the correlation coefficient and the

2R2

related?

(g) What is the value of the root mean squared error of the regression (standard error of regression)? What does this mean?

(h) You should see an outlier in the data set. Rerun the regression (with the "robust" option), dropping the outlier. Does dropping the outlier make a qualitative difference to your results? Explain.