ECON1272
Basic Econometrics
Research Report Group Assignment
This is a group assignment where you are allowed to work in groups of 1-4 other students. All group members will receive the same marks for the assignment, conditional that all group members participate equally. If a group member does not participate in the assignment, no marks can be awarded, if a group member does not participate equally, only partial marks can be awarded.
You must submit an electronic copy of your assignment in Canvas in pdf, doc or docx format along with your R-code copied into assignment. Hard copies will not be accepted. Show your calculations (if any) as well as answering the questions in clear full sentences. The number of tables, graphs, calculations given in parentheses after each question are a guide.
What are the drivers of GDP (PPP) internationally?
Please use the file: GDP2019.Rdata (World Bank Database – 2019 values). Please read the description at the end of this document to understand the variables. In this home assignment we are going to model GDP internationally (dependent variable).
Before you start your work, please rename the variables to a shortform!
QUESTION 1
Please model the drivers of GDP using R, and the attached dataset!
a) Include a minimum of 5 (five) explanatory variables in the regression equation – making sure one of them is trade - and provide a scatter plot of your dependent and independent variables (5 scatter plots). (0.5 x 5 marks)
When modelling, explain each of your functional form. specification choices with respect to:
· Economic or common sense behind the model - why do you pick this variable? (0.5 x 5 marks)
· Multicollinearity – are the independent variables multicollinear (Hint: check VIF or correlation matrix)? (0.5 x 5 marks)
· nonlinear relationships, eg: log-linear or quadratic relationships. Explain why you use a level or Functional form. specification- potential logarithmic form. of a variable. (0.5 x 5 marks)
in writing. You will be graded on model accuracy in this section.
Use OLS standard errors.
(Subtotal: 10 marks) 1 Table [regression output] & Explanations, 5 scatter plots.
b) Interpret the coefficients on 5 explanatory variables. Describe if the coefficients are elasticities or semi-elasticities, or simple level coefficients. (5 marks)
c) Interpret the statistical significance of these coefficients using the p-values OR the t-stat. (5 marks)
d) Test for heteroscedasticity in R using the Breusch-Pagan test and copy below the results. Interpret the results of the Breusch Pagan test. (2 marks) 1 Table & Explanation
e) Present the results from a) using HAC robust errors! Did any of the standard errors change significantly? (3 marks) 1 Table & Explanations
f) Instrumental variable estimation:
· Explain the concept of the reverse causality! Can this apply to GDP and ``Trade (% of GDP)’’? List minimum 3 academic works which have dealt with this relationship. (2 marks)
· What type of regression can we use to address this problem? (1 marks)
· Please visit the World Development Indicators (https://databank.worldbank.org/source/world-development-indicators) (WDI) database online, and select an instrumental variable for ``Trade (% of GDP)’’ . What have you selected and why? Describe the criteria for a good/valid instrument and whether your variable of choice satisfy these? [ Hint: pay attention to observation numbers so you do not lose marks over low degrees of freedom]. (3 marks)
· Run an IV regression with your variable of choice (downloaded), and copy the regression results below. (6 marks)
· How did the coefficient on trade change after you used an instrumental variable approach (regression)? (1 mark)
(Subtotal: 13 marks)
g) Present a functioning R code reproducing your results below! (2 marks)
Assignment total: 40 marks